B the gap SeSSion a Legal Research.NYS Tax...Timothy P. Noonan, Hodgson Russ LLP; Lance E....

NY

CL

A-

CL

E

IN

st

It

ut

E

Bridge the gap SeSSion a:nYS tax oBligationS for BuSineSSeS ConduCting

CommerCe on the internetPrepared in connection with a Continuing Legal Education course presented

at New York County Lawyers’ Association, 14 Vesey Street, New York, NY presented on Tuesday, January 15, 2013.

P r o g r A m C o - s P o N s o r s :

NYCLA’s Cyberspace CommitteeNYCLA’s Taxation Committee

P r o g r A m C h A I r s :

Allan R. Pearlman, Chair, NYCLA’s Cyberspace CommitteeMegan L. Brackney, Kostelanetz & Fink, LLP, Chair, NYCLA’s Taxation Committee

P r o g r A m F A C u L t Y :

James Connolly, NYS Department of Taxation and Finance; Dan Jordan; NYCLA Director of Library Services; Timothy P. Noonan, Hodgson Russ LLP; Lance E. Rothenberg, Hodgson Russ LLP

4 TRANSITIONAL & NON-TRANSITIONAL MCLE CREDITS: This course has been approved in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 4 Transitional & Non-Transitional credit hours: 2 PP/LPM; 2 Skills

Information Regarding CLE Credits and Certification Bridge the Gap Session A: Tax Legal Research / NYS Tax Obligations for

Businesses Conducting Commerce on the Internet Tuesday, January 15, 2012 5:30 PM to 9:00 PM

The New York State CLE Board Regulations require all accredited CLE providers to provide documentation that CLE course attendees are, in fact, present during the course. Please review the following NYCLA rules for MCLE credit allocation and certificate distribution.

i. You must sign-in and note the time of arrival to receive your

course materials and receive MCLE credit. The time will be verified by the Program Assistant.

ii. You will receive your MCLE certificate as you exit the room at

the end of the course. The certificates will bear your name and will be arranged in alphabetical order on the tables directly outside the auditorium.

iii. If you arrive after the course has begun, you must sign-in and note the time of your arrival. The time will be verified by the Program Assistant. If it has been determined that you will still receive educational value by attending a portion of the program, you will receive a pro-rated CLE certificate.

iv. Please note: We can only certify MCLE credit for the actual time

you are in attendance. If you leave before the end of the course, you must sign-out and enter the time you are leaving. The time will be verified by the Program Assistant. Again, if it has been determined that you received educational value from attending a portion of the program, your CLE credits will be pro-rated and the certificate will be mailed to you within one week.

v. If you leave early and do not sign out, we will assume that you left at the midpoint of the course. If it has been determined that you received educational value from the portion of the program you attended, we will pro-rate the credits accordingly, unless you can provide verification of course completion. Your certificate will be mailed to you within one week.

Thank you for choosing NYCLA as your CLE provider!

New York County Lawyers’ Association

Continuing Legal Education Institute 14 Vesey Street, New York, N.Y. 10007 • (212) 267-6646

Bridge the Gap Session A: Tax Legal Research / NYS Tax Obligations for Businesses Conducting Commerce on the Internet

Tuesday, January 15, 2012 5:30 PM to 9:00 PM

Program Chairs and Moderators:

Allan R. Pearlman, Chair, NYCLA's Cyberspace Committee Megan L. Brackney, Kostelanetz & Fink, LLP, Chair, NYCLA's Taxation Committee

Faculty: James Connolly, NYS Department of Taxation and Finance; Dan Jordan; NYCLA Director of Library Services; Timothy P. Noonan, Hodgson Russ LLP; Lance E. Rothenberg, Hodgson Russ LLP

AGENDA

5:00 PM – 5:30 PM Registration 5:30 PM – 6:00 PM Tax Legal Research 6:00 PM – 9:00 PM NYS Tax Obligations for Businesses Conducting Commerce

on the Internet

Legal Tax Research 1 Dan Jordan, NYCLA Director of Library Services

Faculty Biographies Dan Jordan, Director of Library Services, New York County Lawyer’s Association Dan Jordan is the current Director of Library Services for the New York County Lawer’s association, and has occupied the position since 2008. Mr. Jordan has a wealth of experience as a librarian, and has worked as a reference librarian at both Brooklyn Law School and Touro Law School, as well as acting as Head Law Librarian at Touro Law School. In addition to over 30 years of experience as a librarian, Mr. Jordan has a graduate degree in Library and Information Science from the Pratt Institute.

Tax Research

I. Introduction to Research Sources Tax is a complex and technical area of law with frequent changes. It is common for there to be ten or twelve amendments to the Internal Revenue Code in a single year and more than fifty Revenue Rulings. In addition, there are dozens of regulatory and administrative documents generated by the IRS. Researchers must be aware of the types of documents, how they can be located and updated, and their level of authority. Because of this complexity and constant change, tax researchers use specialized tools which provide more detailed information and make research more efficient. Tax even has special Bluebook citation rules for administrative materials because of its specialized terminology and publication forms (see Table I). This research guide introduces specialized materials for tax research and recommends research sources. Tax Databases Tax researchers are fortunate to have several comprehensive research databases specifically for tax, along with well-developed resources on both LexisNexis and Westlaw. Lexis and Westlaw databases include the primary sources described here, along with news, pending legislation, analytical materials and other related resources collected and organized together in integrated tax research systems. The databases have sophisticated searching and linking capabilities, including retrieving known documents by citation or name. Throughout this guide, reference to “tax databases” refers to this group of electronic resources. These tax database services are developed for use primarily by experienced tax professionals and may be overwhelming or frustrating to the novice user at first. Researchers may wish to consult, as an overview, Katherine Pratt et al., The Virtual Tax Library: A Comparison of Five Electronic Tax Research Platforms, 8 Flor. Tax Rev. 933 (2008). This article provides a detailed comparison of the primary and secondary resources and features of LexisNexis, Westlaw, BNA Tax & Accounting Center, CCH IntelliConnect, and RIA Checkpoint. 1. CCH IntelliConnect CCH IntelliConnect is the electronic equivalent of the Standard Federal Tax Reporter print "looseleaf service." It also includes additional content, such as the former CCH Federal Estate and Gift Tax Reporter, state tax codes, tax treaties, Aspen treatises and other analytical material. One strength of this database is the organization by Code section, followed by relevant regulations, and annotations for administrative documents and cases, all updated weekly. Tax Tracker News, a collection of daily journals, can be customized by subject and jurisdiction, and received as an email alert 2. RIA Checkpoint RIA Checkpoint includes electronic equivalents of the Federal Tax Coordinator 2d and United States Tax Reporter print "looseleaf services." The Law Library also maintains

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1017925

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1017925

these two titles in print (Tax Collection). RIA Checkpoint includes selected Warren Gorham & Lamont tax journals and treatises, and other analytical and news materials. 3. LexisNexis and Westlaw LexisNexis and Westlaw both have extensive tax libraries, although LexisNexis is generally considered stronger in tax. Both systems include the Internal Revenue Code, regulations, cases, IRS rulings and pronouncements, and daily and weekly current awareness services, as well as journals and other secondary source material and, of course, integration of cases. Westlaw includes the full text of treatises published by the Thomson-West family (including the RIA services, and Warren Gorham & Lamont treatise titles). LexisNexis provides the text of Wiley and Matthew Bender treatises; if you know the publisher of a particular book title, you can determine which service has the searchable text. LexisNexis offers two approaches to researching tax materials: its Tax Library (FEDTAX) and its LexisNexis Tax Center. Adding a Tax Tab in Lexis and in Westlaw is recommended for identifying and accessing tax materials. 4. BNA Tax and Accounting Center The Tax and Accounting Center includes analysis, news, primary sources and practice tools covering federal, state and international tax, as well as financial accounting. Tax Management Portfolios are the major resource in the database. The more than 450 Portfolios are issued in three series: U.S. Income; Foreign Income; and Estates, Gifts, and Trusts with each series subdivided into many narrow areas of tax law examined in great depth. This is a highly recommended resource. 5. IRS Website The Internal Revenue Service provides a great deal of current information, including forms, on its website. Although the browse capability works better than searching, the site offers search options for retrieving tax materials. Choose the Tax Professionals tab, then the Basic Tools for Tax Professionals link in the left column for the best access to research materials, such as the code and regulations, the Internal Revenue Bulletin, and the Internal Revenue Manual. II. Starting Places A. Standard Treatises The following selected titles are useful for topical overviews of tax issues generally, or in specific areas of taxation. Some of the works are very scholarly, some practical, and others provide more general overviews. These materials should be used as a starting point to understand the issues and to collect references for further research. West’s Tax Law Dictionary is always helpful in a field with technical terms and jargon. Bittker & Lokken. Federal Taxation of Income, Estates and Gifts, 3d ed. 5 vols. This treatise is the recommended starting point for all types of tax questions. Boris Bittker is also the co-author of several other treatises on more specific areas (see below).

Federal Tax Coordinator (RIA), 2d ed. 28 vols.; online in RIA Checkpoint). This comprehensive tax service, which is designed for the non-specialist but with detail and breadth of coverage, is organized by topic (rather than Code section) and reads more like a treatise. This is a good resource if you do not know where to start, or if you suspect that more than one code section applies to your problem because it discusses the interrelationship of sections. Extensive tables are provided by code section, regulation, and case name. Federal Taxation (American Jurisprudence 2d). For treatment of taxation by a legal encyclopedia, American Jurisprudence 2d includes 3 volumes on federal taxation. These sections reprint content from RIA Tax Guide and Estate Planning and Taxation Coordinator B. Income Tax Bittker, McMahon & Zelenak. Federal Income Taxation of Individuals, 3d ed. Burke & Friel. Understanding Federal Income Taxation, 3d ed. McNulty & Lathrope. Federal Income Taxation of Individuals in a Nutshell, 7th ed. 2004 Posin & Tobin. Principles of Federal Income Taxation (Concise Hornbook series), 7th ed (Rev. ed. of: Principles of Federal Income Taxation, 6th ed. 2003). Rosenberg & Daher. The Law of Federal Income Taxation (Hornbook), 2008 III. Court Opinions Income tax litigation begins in one of three forums (see chart). If the taxpayer has not paid the tax, the forum is the United States Tax Court. In this forum, there is no right to a jury trial, but the judges have more tax expertise and sophistication due to the specialized nature of the court. If the taxpayer has paid the disputed tax and is then refused a refund, the forum is either the federal district court (where he is entitled to a jury trial) or the Court of Federal Claims.

Appeals from Tax Court and federal district court decisions are to the Circuit Court of Appeals covering the taxpayer's state of residence. Appeals from the Court of Federal Claims are to the United States Court of Appeals for the Federal Circuit (created Oct. 1, 1982).

Locating relevant decisions usually begins in the database services with annotation summaries that follow the code section and regulations in an arrangement similar to that of an annotated code. Annotations in the tax databases include summaries of both cases and IRS pronouncements relevant to the section. Opinions from the federal courts and the Tax Court are available in official publications as well as commercial publications. The similarity in abbreviations for all these reporters, as well as the changes in publisher names and titles of the reporters, can cause some confusion. Table 1 of the Bluebook includes a short list for the Tax Court publications. A. Tax Court Opinions There are two kinds of decisions from the Tax Court, which are somewhat parallel to published vs. unpublished decisions from other courts. Tax Court Regular Opinions are opinions designated by the Chief Judge of the Tax Court as containing novel or important issues, and can be thought of as “published” opinions. The Chief Judge also decides whether these opinions will be reviewed by all the judges, or will stand as written by the judge who heard the case. They are published officially in the United States Tax Court Reports (TC) (some volumes entitled Tax Court of the United States Reports). Before 1942, when the Tax Court was called the Board of Tax Appeals, the official reporter was the Board of Tax Appeal Reports. These official reporters are also available online through HeinOnline's U.S. Federal Agency Documents, Decisions and Appeals Library. Tax Court Memo Decisions are the opinions not designated as "Regular". For some time, they were not published “officially” and were thought of as unpublished opinions. The precedential value of TC Memo decisions is under change, much the same as other "unpublished" federal court opinions. Since 2001, the Tax Court has also issued Summary Opinions that are designated as without precedential value. Orders issued by the Court are available on the court web site from 2011 to date. All decisions from the Tax Court are available since September, 1995 with daily update on the Tax Court website. The content of TC and Memorandum Opinions published after September 1995 and Summary Opinions published after January 2001 can be searched by key words and phrases. Both Tax Court Regular and Tax Court Memo Decisions are available in CCH, and RIA Checkpoint. For opinions published before 2008 the Law Library also has the unofficial print sources CCH Tax Court Reporter and Tax Court Reported & Memorandum Decisions (RIA). When researching with the print editions, be aware that cases are found in bound volumes or transfer binders. TC Regular decisions are found in CCH Tax Court Reporter Transfer Binders and RIA Tax Court Reports. Memo Decisions are in CCH Tax Court Memorandum Decisions (T.C.M), RIA Tax Court Reports (T.C. Memo, and earlier volumes by Prentice Hall), and P-H B.T.A. Memorandum Decisions (B.T.A.M. P-H). Tip: Citations to these unofficial reporters use paragraph numbers for reference to new material and then by the volume and page number for the bound volumes. B. Federal District Courts

Remember that there is no official reporter for opinions from these courts. Tax opinions are published along with other federal district court opinions, in West’s Federal Supplement (since 1932) and Federal Reporter (before 1932). C. Court of Federal Claims The Court of Federal Claims hears a larger percentage of tax cases than other federal district courts. Between Oct. 1, 1982, and Oct. 29, 1992, this court was called the United States Claims Court. Before that, it was known as the United States Court of Claims and only the Supreme Court had jurisdiction over appeals from its decisions. Court of Federal Claims decisions are published in the U.S. Court of Claims Reports (Doc. Ju 3.9), West's United States Claims Court Reporter (1982-1991), and West’s Federal Claims Reporter (1992- ). D. Federal Appellate Courts Tax opinions from the U.S. Circuit Courts of Appeals and Court of Appeals for the Federal Circuit are published in the Federal Reporter series. West's Federal Claims Reporter (formerly United States Claims Court Reporter) includes opinions from the Court of Appeals for the Federal Circuit and the Supreme Court. E. Unofficial Reporters The major tax research databases and looseleaf services publish nearly all of these cases, plus additional district court cases not reported in F. Supp. These resources are sometimes the only source of some federal district court opinions on taxation. Opinions for all these courts are collected and published in CCH U.S. Tax Cases (U.S.T.C.) and American Federal Tax Reports (A.F.T.R., A.F.T.R. 2d). F. Acquiescence Decisions & Actions on Decisions Only decisions by the U.S. Supreme Court are binding authority on the IRS. For decisions from other courts in which the IRS does not prevail, the Commissioner must decide whether to abandon its position in the litigation (acquiescence) or to continue to pursue the IRS’s position in subsequent litigation contrary to the court decision (non-acquiescence). This stance is obviously very important information, and is unlike deciding whether a case is “good law” for non-tax topics. The tax citators include information on these decisions. The decision on acquiescence is usually made quickly; however, if there is no decision, this is not the same as an acquiescence. Acquiescence or non-acquiescence has the same legal effect as a Revenue Ruling. Actions on Decisions (AODs) are internal IRS communications that are occasionally written to summarize a court decision which is adverse to the IRS position, and to recommend IRS acquiescence or non-acquiescence. AODs are not written for all decisions. They are intended to provide guidance to IRS staff who are working on similar issues, until an official acquiescence or non-acquiescence is decided. If the decision is by a court other than the Tax Court, the Actions on Decisions indicate whether the IRS will appeal the court's decision. This background information can help the researcher assess future IRS policy.

AODs can be found in Tax Notes; online in Westlaw (FTX-AOD) and LexisNexis (FEDTAX;AOD). The Internal Revenue Bulletin lists the Commissioner's decision whether to acquiesce as soon as it becomes available, as a Notice. The Cumulative Bulletin consolidates the list semiannually and annually. Stow Lovejoy: Sources of Federal Tax; International Tax IV. Sources of Tax Authority A. Internal Revenue Code and Statutory Law Title 26 of the United States Code contains most federal tax laws and is known as the Internal Revenue Code (“IRC” or the “Code”). However, statutes relevant to your research may be outside the IRC when an agency other than the Treasury Department has primary responsibility for that area of law. Knowing the relevant IRC sections is the best method for using specialized tax services, citators and other resources. The Code is organized fairly logically, with all provisions on a particularly sub-topic usually found together, and with numerous cross-references to related sections. It is useful to scan the table of contents for a chapter to get an idea of the overall structure of a topic. Tax also includes hundreds of "terms of art", or seemingly ordinary words, such as "expense" or "compensation," that have special meanings. Always look for definitions that apply in the section or sub-section. Also, IRC § 7701 contains over 50 definitions of commonly used terms. Following the adoption of the 16th Amendment, the first Revenue Act was passed in 1913. There have been three major tax codifications: the Internal Revenue Codes of 1939, 1954, and 1986. Since 1954, the structure and numbering has remained the same. These landmark dates help in tracing retrospective tax materials and references to them are still common. The current version of the IRC can be found in the standard U.S. Code publications (U.S.C., U.S.C.A., U.S.C.S.), and in specialized tax databases. Annual editions of the IRC are also published in print. CCH IntelliConnect includes an archive of the 1939 Code (as last amended), 1954 Code (as last amended) and annually 1978- . HeinOnline's Taxation & Economic Reform in America library includes the 1939 and 1954 codes, as well as extensive legislative history materials. B. Administrative Law The Department of the Treasury is the executive department responsible for implementing tax laws. The Internal Revenue Service (IRS), a bureau within the Treasury, performs that function, issuing numerous types of documents for both interpreting the Code and enforcing the law. These documents range from regulations to letters commenting on specific transactions.

1. Regulations

Regulations are the highest administrative authority issued by the Treasury Department and are commonly referred to and cited as Treasury Regulations, and once finalized, as Treasury Decisions or T.D.'s. Regulations are codified in Title 26 of the Code of Federal Regulations, and are found individually in many other places. Bluebook citation does not require reference to the CFR as with other regulations, but notes these as Treas. Reg. Annual editions of tax regulations are published each year in Federal Tax Regulations (West). The set includes tax regulations in force as of January 1 of each year. Income Tax Regulations (CCH). Treasury regulations, unlike most regulations, have a specific numbering scheme consisting of three parts: a prefix before the decimal indicating the type of tax (e.g. 1 for income, 20 estate & gift, 30 employment, and 40 excise taxes); numbers following the decimal corresponding to the IRC section; numbers after the dash are the numbering scheme for the regulations. Thus, Treas. Reg. § 1.167(a)-1 is the first regulation on the income tax code section 167(a). There are two general types of regulations: (1) legislative regulations, when the legislation has specific language granting the IRS authority, are authoritative and extremely difficult to challenge; and (2) interpretive regulations, which can be attacked by showing that the regulation is contrary to the IRC and was issued under general authority of the Treasury to make rules and regulations. Generally the distinction depends upon the breadth of authority which Congress gave the IRS for rule-making in a particular area. The process for adopting regulations generally follows administrative law ‘notice and comment’ practice as required under the Administrative Procedures Act. Three stages are used for tax; all three kinds of regulations are officially published in the Federal Register: i. Proposed Regulations are issued as a "Notice of Proposed Rule Making.” The IRS may also publish an Advance Notice of Proposed Rulemaking to get input even before a proposed regulation is drafted. Note the “Regulation Identification Number (RIF)” and Project Number for help in tracing future actions. ii. Temporary Regulations are effective immediately. They are often issued after new IRC sections become law to guide taxpayers more quickly, before the IRS goes through the comment and revision process. A temporary regulation can remain in effect for up to 3 years. Temporary regulations are usually issued simultaneously as Proposed Regulations. iii. Final Regulations are accompanied by a preamble containing analysis and a summary of comments and changes that provide important background and history for interpretation. After the mandatory comment period, the final regulation, almost always an amended version of the proposed regulation, is adopted as a Treasury Decision (T.D.). The T.D. number is used for access in finding lists and citators, rather than the CFR citation. The tax databases and looseleaf services note proposed and temporary changes along with current regulations, making it easy to keep up to date. All proposed regulations are also available in the usual electronic research sources and are published together in

print in Vol. 18 of United States Tax Reporter, and Vol. 27A of Federal Tax Coordinator 2d. More importantly, when there is a change in the Code, the prior regulations for that section may become obsolete and inconsistent with the current Code provisions. The process to write and adopt revised regulations takes a considerable amount of time. The tax databases do a very good job of alerting the researcher to these inconsistencies with "Caution" notations. If you identify a regulation in some other source, check that it is consistent with the current code provision before relying on it. 2. Administrative Publications Internal Revenue Bulletin (IRB), published weekly, is used by tax researchers and practitioners to monitor regulations and other Treasury pronouncements. The IRB includes Revenue Rulings, Revenue Procedures, Treasury Decisions, IRS notices and News Releases, and acquiescence or non-acquiescence in court decisions (AODs). All stages of activity for regulations are also tracked in the Federal Register. The IRB is cumulated into the Cumulative Bulletin (CB) twice a year. As evidence of their significance, the IRS also provides advance notice of some administrative materials, even before publication in the IRB and the Federal Register. See Advance Notice for Tax Professionals and the IRS Advance Releases database on LexisNexis. The IRS GuideWire service provides subscribers with email alerts of these releases. The IRB is included in the tax databases, on the IRS website, and reprinted as part of the RIA Federal Tax Coordinator 2d. Administrative documents and pronouncements included in the IRB can also be retrieved as individual documents in the tax databases; LexisNexis and Westlaw also provide access. Following are descriptions of the most important IRS documents and where to locate them. Although not as authoritative as regulations, these materials provide important additional guidance on what taxpayers can expect the IRS to do. a. Revenue Rulings are pronouncements about particular factual situations which taxpayers have presented to the IRS, and which the Service determines to be of general interest. They provide analysis of a transaction and relevant Code provisions. Although they do not have the weight of regulations, they can be relied upon by a taxpayer in a similar situation. The IRS is bound by a Revenue Ruling unless it is officially revoked. Status of Revenue Rulings can be determined by using one of the citators or by checking the "Finding List of Current Action on Previously Published Rulings" in the IRB. Before 1953, rulings were titled I.T. (income tax) or E.T. (employment tax) rulings or various other names such as O.D. (office decisions). Since 1953 they have been called Revenue Rulings and numbered chronologically preceded by the year of issuance. Revenue Rulings are published in full in Tax Notes and online in LexisNexis and in the Federal Taxation - Revenue Rulings database on Westlaw. b. Revenue Procedures are IRS pronouncements which address internal practice and procedure, such as describing how to request a ruling; listing requirements of how to qualify as a Subchapter S corporation; or what depreciation methods are acceptable.

c. Letter Rulings. Like Revenue Rulings, Letter Rulings (LTRs) or Private Letter Rulings (PLRs) are IRS responses to questions from individual taxpayers about proposed transactions. However, they are not considered of general interest, and are not officially published; their application is technically limited to the taxpayer making the request and without precedential authority. They became available in 1976 under the Freedom of Information Act, and are used frequently by tax practitioners as indicators of how the IRS will view a transaction and of IRS policy. d. Technical Advice Memoranda (TAMs) are another type of private ruling and are issued in the same numerical series as PLRs. They are written by the IRS national office in response to a question from a taxpayer or field officer auditing a return. Therefore, they are considering completed rather than proposed transactions. More carefully reviewed than Private Letter Rulings, they also technically have no precedential authority. Field Service Advice (FSA) are similar documents. Determination Letters are responses by local IRS district offices on completed transactions. The full text of PLRs and TAMs are available from 1954 to the present in the tax database services. PLRs and TAMs are digested in Tax Notes. e. Notices and Announcements from the Public Affairs Division of the IRS provide a range of information for general distribution. Examples are to summarize a new law, or to give notice of procedural changes. Notices and Announcements are included in the IRB, but only Notices are included in the CB. f. General Counsel Memoranda or Chief Counsel's Memoranda are prepared by the IRS office of Chief Counsel as internal guidance to explain the reasoning behind Revenue Rulings, Private Letter Rulings and Technical Advice Memoranda. Since 2002 few (if any) GCMs have been issued. GCMs are numbered sequentially but without any indication of their year of issue. They are published in Tax Notes, and are available on LexisNexis (FEDTAX;GCM) and Westlaw (FTX-GCM). g. Internal Revenue Manual (IRM) is a compilation of operating policies and practices of the IRS. The Manual is divided into parts based on IRS department organization (e.g., Taxpayer Service, Audit, and Market Segment Specialization Program). It includes policies, procedures, instructions and guidelines related to the function and administration of the IRS. The IRS publishes the Manual on its website; it's available in print from CCH, online in CCH IntelliConnect, and on Westlaw (RIA-IRM) and Lexis (FEDTAX;MANUAL). Changes are published in Tax Notes V. International Tax Isenbergh. International Taxation: U. S. Taxation of Foreign Persons and Foreign Income, vols 1 – 4 (CCH). Postleawaite. International Taxation: Corporate and Individual, 5th ed. vols 1 and 2. Rhoades. Income Taxation of Foreign Related Transactions. Rhoades & Langer. U. S. International Taxation & Tax Treaties (Mathew Bender publication, not available in print in this library). VI. Tracing the History of Code Sections

Cumulative Changes in Internal Revenue Code of 1954 and Tax Regulations under the Code (RIA) is a looseleaf service which summarizes changes since 1954 and provides the derivation of Code sections. It also provides the full text of previous versions of code and regulation sections. Citations for legislative history research can be found here as well. Barton's Federal Tax Laws Correlated traces income, estate, and gift tax provisions from the Revenue Act of 1913 through 1968. Originally in several editions, this reprinted edition includes information presented and collected in various ways sometimes including case annotations, citations to legislative history, effective dates and cross-reference tables depending on the time period covered. Barton's is also available in HeinOnline's Taxation & Economic Reform in America library. A. Legislative History Several print sources in the Law Library track legislative history information for retrospective tax legislation. The most comprehensive selection of legislative history materials is in HeinOnline's Taxation & Economic Reform in America library. Most, if not all, the print titles identified below are online in this collection, where they can be searched using field searching and Boolean connectors. Legislative History of the Internal Revenue Code of 1954). Covers 1954-1965 with references back to the derivation of sections in the 1939 Code. Internal Revenue Acts, Beginning 1954; Text of Acts and Legislative History, with Tables and Index . This set includes full reprints of all bill versions, hearings reports, studies and related materials for a full range of tax legislation. Note that no Code or subject index is included, and the index is by revenue act. Seidman's Legislative History of Federal Income Tax Laws 1938-1861 Seidman's Legislative History of Federal Income and Excess Profits Tax Laws, 1953-1939 Seidman's is not comprehensive; the author omitted items he considered to have little interpretative significance. There is however, great detail and depth for what is included and many excerpts. Internal Revenue Acts of the United States, 1909-1950: Legislative Histories, Laws and Administrative Documents. Carlton Fox was a Justice Department lawyer who compiled this collection of 146 print volumes. Search by document type, bill number, volume number, date of publication, popular name, and more. In addition to the usual sources for more recent legislative history, documents for tax legislation are in several other sources: The Internal Revenue Cumulative Bulletin reprints the public laws from Statutes at Large along with congressional reports from the legislative history of major revenue acts since 1919 (with the exception of 1954 Code). "Blue Books" prepared by the staff of the Joint Committee on Taxation are detailed explanations of tax legislation. Although not part of the legislative history per se, Blue Books are most helpful for explaining and tracing the path of the legislation through Congress and giving the researcher an overview of adopted legislation. Michael Wargon: State Tax VII. State Tax

http://search.library.duke.edu/search?id=DUKE003131760

http://search.library.duke.edu/search?id=DUKE003131760

Hellerstein and Hellerstein. State Taxation, 3d. ed. vols 1 and 2. Emphasis in this treatise is on federal constitutional restraints on state taxing, uniformity and equity requirements, as well as, state income, franchise, and sales and use taxes. All State Tax Guide. RIA's 2 volume guide covers all 50 states and the District of Columbia. North Carolina Tax Reporter. This 2 volume CCH looseleaf service covers North Carolina state tax law in detail.

1/11/2013

1

Legal Research‐Tax‐

Legal Resources for Tax Research

And the NYCLA LibraryCopyright 2012, Daniel Jordan

Legal Research Overview

Types of Legal Literature

Primary Source Material

Secondary Source Material

Finding Tools


Primary

The Law

Secondary

Commentary on the Law

Finding Tools

Assists in finding Primary and Secondary Source materials

1/11/2013

2


Primary

• Cases

• Constitutions

• Statutes

• Treaties

• Administrative

Regulations

• Administrative

Decisions

• Municipal

Rules, Regulations

& Decisions

Secondary

• Text books

• Treatises

• Legal

Encyclopedias

• ALRs

• Law Reviews

• Headnotes

• Notes of Decisions

• Practice Commentaries

• Non‐legal Materials

Finding Tools• Shepards

• Keycite

• Bibliographies

• Index to Legal

Periodicals

• Legal Resources Index

/LegalTrac

• IndexMaster

• Other Indexes

– Subject

– Table of Cases

– Table of statutes

– Conv. Tables

Formats for legal Information

Formats of Legal information have changed through time. Some continue to have vibrancy, while some are now disused.

A now disused format

Cuneiform

1/11/2013

3

Example of a cuneiform legal source

Hammurabi’s Code

For example, the 8th law of the Code reads: “If any one steal cattle or sheep, or an ass, or a pig or a goat, if it belonged to a god or to the court, the thief shall pay thirty fold; if they belonged to a freed man of the king he shall pay tenfold; if the thief has nothing with which to pay he shall be put to death.”


This stele, found

at the Louvre, contains the text of Hammurabi’s code, circa 1800 BCE.


The Oral tradition:

1/11/2013

4


The Oral Tradition continues:

Formats for legal InformationHand written 13 Century Law, Iceland


Books

1/11/2013

5


Microforms / Microcards


Modern alternate formats:

CDs


Online sources:

1/11/2013

6

Mobile Formats

• If not now, when?

New York County Lawyers’ Association Online Resources:

Westlaw

Lexis

Bloomberg Professional

Cost: No Charge to members

Training: Every month

Limitations: Onsite only

*Most NYCLA Members qualify for off‐site access to Legal Resources. Check with Dan after CLE program.

The U.S Constitution and Tax Research

Tax research rarely involves the Constitution though it contains several specific provisions for taxation.

Apportionment Clauses: Art. I, section 2, clause 3 and Art. I, section 9, clause 4.

Origination Clause: Art. I, section 7, clause 1.

Uniformity Clause: Art I, section 8, clause 1.

Export Clause: Art I, section 9, clause 5.

Income Tax: 16th Amendment

1/11/2013

7

Statutory SchemeUnited States Code Title 26: Internal Revenue Code of 1986

Prior Versions: Internal Revenue Code of 1954

Internal Revenue Code of 1939

It is important for tax attorneys to monitor pending legislation.

Researchers should be mindful of the enactment date, the effective date and the sunset date of tax code provisions.

The NYCLA Library relies on the USCA for a print version of the current Internal Revenue Code and the USCA (Westlaw) and the USCS (Lexis) for electronic versions.

An unannotated version of the Internal Revenue Code can be found on Loislaw.

Superseded versions of the Internal Revenue Code are in the NYCLA Library in old USCA volumes (superseded) and in older editions of CCH Tax publications.

Individual Revenue ActsFirst published as slip laws and then bound in Public Law number order into:

United States Statutes at Large.

Also found in the US Code Congressional Administrative News (West)

The NYCLA Library has United States Statutes at Large going back to 1789.

Westlaw: US‐STATLRG ‐ Public Laws 1789 – 1972US‐PL‐OLD ‐ Public Laws since 1972US‐PL ‐ Public Laws from the current session

Pending and Potential Legislation

Track through Library of Congress THOMAS website.

Track and set up automatic alerts through:

Westlaw: Federal Taxation Congressional Bills (FTX‐BILLTXT)

Lexis: Congressional Bills and Bill Tracking ‐ Current Congress (BILLS file)

1/11/2013

8

Legislative HistoryResearch Tax Legislative history as you would any other federal legislation.

Proquest Congressional (formerly know as Lexis Congressional Universe)*

Legislative History of P.L 99‐514, Tax Reform Act of 1986 in materials.

Legislative Histories for the last 20 years (approximate) have hot links to full text documents.

Blue Book and Other Staff Documents – issued at the end of each Congressional Session by the Joint Committee on Taxation and offering an explanation of tax legislation from the current session.http://www.jct.gov/publications.html?func=select&id=9

* Available in the NYCLA Library and available to many members off‐site through the New York State Library

Treasury RegulationsThere are two types of tax regulations:

‐Legislative Regulations – written by IRS experts under a specific grant of authority under an IRC section,

‐General Authority Regulations ‐ interpretive regulations written by the Treasury Department under the authority of IRC 7805(a).Will be upheld by the courts unless the regulations clearly contravene congressional intent.

Title 26 Code of Federal Regulations contains temporary and final regulations and are numbered based on the underlying Code section. The CFR is kept up‐to‐date by the Federal Register.

Proposed regulations appear in the Federal Register and their project numbers do not reflect the Code Section. This factor makes online searching a valuable approach to find proposed regulations by Code section, project number or subject matter.

Many Tax Code sections lack regulations. Because of changes in the underlying statutes, other regulations fail to reflect current law.Priority Guidance Plan – Anticipated projects concerning regulations and guidance projects for the next year. www.gpo.gov/fdsys/pkg/FR‐2012‐02‐13/pdf/2012‐1654.pdf

Semiannual Agenda of Regulations ‐www.federalregister.gov/articles/2012/02/13/2012‐1652/semiannual‐agenda‐of‐regulations

1/11/2013

9

Types of IRS PronouncementsRevenue Rulings – rulings on matters of general interest, applying the law to

a particular situation. Not as authoritative as a Treasury regulations. May be retroactively applied unless stated otherwise, subject to IRC sec. 7805(b). not deemed of general interest. All published in the Internal Revenue Bulletin andCumulative Bulletin

Revenue Procedures and Procedural Rules – published statements of IRS practices and procedures. Published in the Internal Revenue Bulletin and Cumulative Bulletin. The first issued each year establishes procedures for obtaining letter rulings, determination letters, closing agreements and sets fees; the second deals with requests for technical advice; and the third lists areas in which the IRS will not grant rulings.

Notices, announcements and other items – notices are for guidance, announcements are for time sensitive matters.

Publically Released PronouncementsAs a result of freedom of information requests the following documents, which are not binding on the IRS, are also available:

Private Letter Rulings‐ illustrate IRS policy as applied to an individual’s circumstance.

Technical Advice Memorandum‐ issued by the IRS National Office to a local office.

Actions on Decisions‐Indicates a decision whether to appeal an adverse court decision.

General Counsel Memorandum‐show reasoning and authority for revenue rulings.

Internal Revenue Manual‐ IRS operating policies.

Chief Counsel Advice‐ field service advice and service center advice.

Chief Counsel Bulletins‐ discussing bankruptcy, criminal, litigation and FOIA news.

Litigation Guideline Memorandum‐ litigation strategy.

Industry Specialization Program – auditing advice by industry.

Trial Courts for Tax Cases

Federal trial courts dealing with Tax matters:

United States District Courts – Taxpayer must pay amount in dispute and seek refund.‐ allows jury trials.

United States Court of Federal Claims ‐ Taxpayer must pay and seek refund.‐appeals to the U.S. Supreme Court.

United States Tax Court – Decisions published officially. ‐Memorandum Decisions published unofficially.‐Both have value as precedent.

United States Bankruptcy Courts‐involving priority liens and related matters.‐Also issues substantive tax rulings.

1/11/2013

10

Locating DecisionsDecisions of the U.S. Supreme Court, U.S. Courts of Appeals, and the U.S. District Courts are published in the usual reporters:

U.S. ReportsFederal ReporterFederal SupplementU.S. Court of Federal Claims ReporterU.S. Tax Court ReportsBoard of Tax Appeals ReportsWest’s Bankruptcy Reporter

In addition, cases from these courts, including otherwise unreported cases, appear in these unofficial reporters:

American Federal Tax Reports (AFTR) – in conjunction with RIA U.S. Tax Reporter (West).

Westlaw – <FTX‐all>

U.S. Tax Cases (U.S.T.C.) – in conjunction with Standard Federal Tax Reporter (CCH).

Tax Court Reports ‐ in conjunction with CCH Tax Court Reports (CCH)

Looseleaf Services, and Encyclopedias

NYCLA Library holdings:

Tax Management Portfolios‐ U.S. Income & Estates, Gifts and TrustsPortfolios cover narrow areas of tax law in great depth.Portfolios include analysis, worksheets‐checklists and a

bibliography.Portfolios are regularly updated.Master index by subject and by code section

Merten’s Law of Federal Income Taxation Available via Westlaw ‐ <MERTENS>

Historical CollectionStandard Federal Tax Reporter and related services (CCH)– 1915 through 2004

TreatisesCorpus Juris Secundum, Internal Revenue volumes ‐ via Westlaw <CJS‐FTX>

Employee Fringe and Welfare Benefit Plans – via Westlaw <EMPFRINGE>

Nonqualified Deferred Compensation Plans ‐ via Westlaw <NQDCOMPPL>

Qualified Deferred Compensation Plans ‐ via Westlaw <QDCOMPP>

Qualified Deferred Compensation Plans Forms – via Westlaw <QDCOMPPFMS>

Qualified Retirement Plans – Via Westlaw <QRP>

Tax Aspects of Real Estate Investments ‐ via Westlaw <TAREI>

White Collar Crime ‐ via Westlaw <WCCR>

McGaffey Legal Forms with Tax Analysis – via Westlaw <ML‐LF>

continued…

1/11/2013

11

More TreatisesTerminating Derivative Transactions: Risk Mitigation –via Westlaw <PLIREF‐TDT>

Practical Guide to Estate Planning (CCH) – via Loislaw

Price on Contemporary Estate Planning (CCH) ‐ via Loislaw

Multistate Guide to Estate Planning (CCH) – via Loislaw

Estate and Gift Tax Handbook (CCH) – via Loislaw

Estate and Retirement Planning Answer Book (CCH) – via Loislaw

Circular 230 ‐via Westlaw <FTX‐CIRC230>

IRS sites on the Internet

Internal Revenue Service: www.irs.gov

Treasury Department: www.ustreas.gov

Library of Congress: thomas.loc.gov

House Ways & Means Committee: waysandmeans.house.gov

Senate Finance Committee: finance.senate.gov

Joint Committee on Taxation: jct.gov

United States Tax Court: ustaxcourt.gov

White House: www.whitehouse.gov

Government Printing Office: www.gpoaccess.gov

Blogs of Interest

TaxProf Blog: <taxprof.typepad.com>

Mauledagain: <mauledagain.blogspot.com>

Ataxingmatter: <ataxingmatter.blogs.com/tax/>

1/11/2013

12

Hammurabi’s Code

See:

avalon.law.yale.edu/ancient/hamframe.asp

NYS Tax Obligations for Businesses Conducting Commerce on the Internet 2 James Connolly, New York State Department of Taxation and Finance Tim Noonan, Hodgson Russ LLP Lance Rothenberg, Hodgson Russ LLP

Allan R. Pearlman bio Allan R. Pearlman, Co-Chair of New York County Lawyers’ Association’s Cyberspace Law Committee, is an attorney in his own practice in New York City. Part of his practice includes representing taxpayers in tax controversies and collection issues in front of the IRS (and/or New York State). Mr. Pearlman also represents and regularly collaborates with other attorneys and firms in civil litigation, appeals, and has done First Amendment constitutional litigation. He has served as local counsel to attorneys around the country with discovery issues in New York. As part of that, he is the author of New York Subpoena for Actions Outside New York: A Practitioner’s Guide to Navigating New York State’s Arcane Procedural Rules so that you can get Your New York State Discovery and be Trial-Ready in Your Home State, While Saving Yourself Oodles of Hours and Thousands of Dollars. This guide addresses the procedural challenges for litigants and counsel with state court cases anywhere outside New York and with an uncooperative nonparty witness in New York. It is designed to help counsel obtain an enforceable New York subpoena which is likely to withstand scrutiny and challenge the first time. It is available for immediate download at http://NYSubpoenaForActionsOutsideNY.com. Before entering private practice, he served as a judicial law clerk at the United States Court of Appeals for the Second Circuit. Then he went across the street to work as a Senior Court Attorney for the New York State Supreme Court at scenic and historic 60 Centre Street. He was awarded the 1994 Public Service Award from NYCLA’s Criminal Justice Section. He is AV-rated by Martindale-Hubbell peer review. SPECIAL DISCOUNT FOR NYCLA: For those attending the January 15, 2013 NYS Tax Obligations program, there is a 35% discount off the $147 list price of the NY Subpoena Guide: to claim this discount, type in the discount code “NYCLArocksJan13” (without the quotation marks) in the appropriate box in the online shopping cart at http://NYSubpoenaForActionsOutsideNY.com (discount good until Feb 12, 2013).

http://nysubpoenaforactionsoutsideny.com/

http://nysubpoenaforactionsoutsideny.com/

James Connolly is an Associate Attorney in the Department of Taxation and Finance’s Office of Counsel, where he has worked for about 20 years. After a stint in litigation, he has worked the last 10 years in the office’s Legislative and Guidance section, where his duties have included the drafting of legislation, preparing Advisory Opinions, and advising the Audit Division, mostly in the sales tax area. He has spoken on sales tax issues before the New York City Tax Institute, the New York State Business Council, and DTF’s internal Continuing Legal Education program. Mr. Connolly is a graduate of the Syracuse University College of Law.

Hodgson Russ LLP www.hodgsonruss.com

000160.01316 Business 10465842v4

NEW YORK STATE SALES AND USE TAX OBLIGATIONS

FOR BUSINESSES CONDUCTING COMMERCE ON THE INTERNET

Prepared For

New York County Lawyers’ Association New York, NY

January 15, 2013 NYCLA Course ID: C121132011

Presented By James Connolly, Esq.1 NYS Department of Taxation and Finance

Office of Counsel [email protected] 518.457.2070

Timothy P. Noonan, Esq. Hodgson Russ LLP [email protected] 716.848.1265

Lance E. Rothenberg, Esq. Hodgson Russ LLP [email protected] 646.218.7639

Program Co-Sponsors

NYCLA’s Taxation Committee – Megan L. Brackney, Esq., Chair NYCLA’s Cyberspace Law Committee – Allan R. Pearlman, Esq., Co-Chair2

1 This outline was prepared by Hodgson Russ, LLP. It does not reflect the opinions of either Mr. Connolly

or the Department of Taxation and Finance. 2 Natalie Sulimani, Esq. is co-chair of the Cyberspace Law Committee with Allan R. Pearlman

http://www.hodgsonruss.com/

mailto:[email protected]



NYCLA – New York . Sales and Use Tax . Obligations For Business Conducting Commerce On The Internet

000160.01316 Business 10465842v4

ROAD MAP I. Overview: New York Sales and Use Tax

II. Taxation of Tangible Personal Property

III. Taxation of Services

IV. Taxation of Computer Software

V. Primary Function / True Object Test

VI. Taxation of The Internet

VII. Taxation of Cloud Computing

VIII. Software As A Service – A Survey of Several States

IX. Taxation of Information Services

X. Nexus Issues

XI. New York “Vendor” Status

XII. “Amazon” Update – Remote Seller Nexus

XIII. Nexus – A Real Life Example: Advisory Opinion No. TSB-A-12(1)S (02/09/2012)

**** This Outline Is For Informational Purposes Only ****

NYCLA – New York . Sales and Use Tax . Obligations For Business Conducting Commerce On The Internet

- 1 - Hodgson Russ LLP

000160.01316 Business 10465842v4

I. Overview: New York Sales and Use Tax A. Sales Tax: New York State imposes a sales tax on retail sales of both tangible

personal property as well as certain enumerated services. Tax Law § 1105.

1. Sales tax is imposed on the receipts from every (non-exempt) retail sale of tangible personal property or taxable service delivered by a vendor to a purchaser in New York. 20 N.Y.C.R.R. § 527.1(a), et seq.

2. Sales tax is a “transaction tax,” meaning the liability for the tax occurs at the time of the transaction.

3. Sales tax is a “destination tax,” meaning the place of delivery (i.e., the place where possession is transferred from seller to buyer) controls the incidence and rate of tax.

4. It is presumed that all receipts from sales of tangible personal property or taxable services are taxable. The burden to prove otherwise is on the vendor or the customer. Tax Law 1132(c)(1).

B. Use Tax: New York State imposes a compensating use tax on both tangible personal property and certain services purchased out-of-state but which are used in New York. Tax Law § 1110.

1. Use tax is imposed on every person for the (non-exempt) use within New York of tangible personal property and certain services, except the extent they have been or will be subject to the sales tax. 20 N.Y.C.R.R. § 531.1(a).

2. Use tax is designed to directly compliment the sales tax.

3. Use tax allows for the taxation of goods and services that are brought into and used in New York, but which were not subject to New York’s sales tax.

4. Use tax is also intended to protect New York businesses from the competitive disadvantage posed by out-of-state businesses that have no presences (nexus) in New York, and thus are not required to charge and collect sales tax on sales to New York customers.

C. New York City: New York City imposes its own sales and use tax, which is similar but not identical to New York State. See NYC Administrative Code § 11-2001, et seq.

D. Rates:

1. NY: 4% (plus local rate: city, county, school district) 2. NYC: 8.875%

NYCLA · New York · Sales and Use Tax · Obligations For Businesses Conducting Commerce On The Internet


000160.01316 Business 10465842v4

II. Taxation of Tangible Personal Property A. Broad Imposition of Tax

1. As a general proposition, the Tax Law broadly imposes a sales tax on receipts from every retail sale of tangible personal property. Tax Law § 1105(a).

2. Retail sale: a sale to any person for any purpose, other than, essentially, a sale for resale or for use in performing a taxable service (where the property becomes a physical component of work performed in the service). Tax Law § 1101(b)(4).

3. Definition of Tangible Personal Property: Broadly defined as “corporeal personal property of any nature.” Tax Law § 1101(b)(6).

4. Includes, for these purposes: gas, electricity, refrigeration and steam as well as pre-written computer software, see infra, as well as newspapers and periodicals. Id.

5. Exemptions: Many. Some examples below:

a. Food, food products, beverages, dietary foods and health supplements, sold for human consumption but not including:

i. candy and confectionery, ii. fruit drinks (containing less than 70% of natural fruit juice), iii. soft drinks, sodas and fountain beverages; and iv. beer, wine. Tax Law § 1115(a)(1).

b. Drugs, medicines, and medical equipment. Tax Law § 1115(a)(3).

c. Prosthetic aids, hearing aids, eyeglasses and artificial devices and component parts thereof purchased to correct or alleviate physical incapacity in human beings. Tax Law § 1115(a)(4).

d. Newspapers and periodicals. Tax Law § 1115(a)(5).

e. Flags of the United States of America and the State of New York. Tax Law § 1115(a)(11).

f. Milk crates purchased by a dairy farmer or New York State licensed milk distributor and used exclusively and directly for the packaging and delivery of milk and milk products to customers. Tax Law § 1115(a)(19-a).



000160.01316 Business 10465842v4

III. Taxation of Services A. Narrow Imposition of Tax

1. In contrast to sales of tangible personal property, the Tax Law imposes a sales tax only on the sale of a limited class of services. If a service is not explicitly enumerated in the statute, then the sale of that service is not subject to tax.

2. In re Rochester Gas and Electric Corp., DTA #800909 (TAT 1991) (“Generally speaking, sales of services are not taxable unless specifically enumerated as taxable.”) (concluding that research and development was not an enumerated service and further that it was not an information service as the Division had contended).

3. Enumerated Services include:

a. Utility Services: Tax Law § 1105(b):

i. Gas, electric, refrigeration and steam services; ii. Telephony and telegraphy services (intrastate only); iii. Telephone answering service; iv. Prepaid telephone calling service; v. Mobile telecommunications service.

b. Traditional Services: Tax Law §1105(c):

i. Information services; (see infra) ii. Producing, fabricating, processing, printing or imprinting

tangible personal property; iii. Installing, maintaining, servicing, or repairing tangible

personal property; iv. Storing tangible personal property; v. Maintaining, servicing or repairing real property; vi. Providing parking, garaging or storing for motor vehicles; vii. Interior decorating and designing services; viii. Protective and detective services; ix. Furnishing entertainment or information services delivered

by telephony or telegraphy (only if the service would otherwise be taxable if it were furnished by printed, mimeographed or printed matter in any other manner); and

x. Transportation services.

c. Other Services: Tax Law § 1105(d)-(f)

i. “Restaurant services” – receipts from sales of alcohol, food, and drink when sold in or by a restaurant, tavern, or caterer;



000160.01316 Business 10465842v4

ii. “Hotel services” – rent for occupancy of a room in a hotel iii. “Admission charges” – certain admission charges to places

of amusement

4. What’s not subject to taxation? – All other services. For example, accounting, legal, and engineering services are not taxable.

IV. Taxation of Computer Software A. Is Software Intangible or Tangible?

1. Software cannot be seen, felt or touched. Nonetheless, the definition of Tangible Personal Property explicitly includes pre-written computer software.

2. “Such term shall also include pre-written computer software, whether sold as part of a package, as a separate component, or otherwise, and regardless of the medium by means of which such software is conveyed to a purchaser.” Tax Law § 1101(b)(6).

B. Pre-Written or “Canned” Software:

1. Definition of Pre-Written Computer Software: “Computer software (including pre-written upgrades thereof) which is not software designed and developed by the author or other creator to the specifications of a specific purchaser.” Tax Law § 1101(b)(14).

2. Early authority:

a. Prewritten computer software is any computer software that is not designed and developed by the author or other creator to the specifications of a specific purchaser. TSB-M-93(3)S.

b. Pre-written computer software includes operating systems, firmware, algorithms, data sets, compilers and translators, assembly routines, utility programs and application programs. TSB-M-98(5)S.

3. Typical examples:

a. Microsoft Excel purchased on CD-Rom at Best Buy; or

b. McAfee Antivirus purchased by download via internet.

4. Consider “software” versus “service:”



000160.01316 Business 10465842v4

a. Store bought tax preparation software vs. accounting and tax return preparation services.

b. TSB-M-93(3)S. Example: A software developer creates an accounting system using prewritten software modules for general ledger, accounts receivable, accounts payable, payroll, inventory management, etc. The developer may also sell the modules separately or bundled in other packages. Even though the modules may be modified to the specific requirements of the client’s business, the sale of the modules is subject to sales or use tax as prewritten software. An additional charge for modification or ‘custom’ programming by the developer would not be subject to sales or use tax if the developer’s charge for the modification is reasonable and is separately stated on the billing statement.

C. Customized Software:

1. Customized Software – Unlike pre-written computer software, customized software is not taxable.

2. Software that has been developed to the needs of one particular buyer and is not sold to anyone other than that buyer is not subject to tax. Tax Law §§ 1101(b)(6), (14). See also Aviation Software, Inc., TSB-A-09(6)S (January 30, 2009).

3. Designing customized software is more akin to providing a nontaxable service than it is to producing a taxable widget.

V. Primary Function / True Object Test A. The Primary Function Test: The Historical Analysis

1. Historically, taxpayers, tax practitioners, and the Department have had to draw lines in determining when a particular service was or was not a taxable service.

2. In making these distinctions, the analysis typically has attempted to distill the transaction’s “primary function.”

3. What’s Being Sold? When examining transactions that include a software component (e.g., a company provides business bookkeeping and accounting services that utilizes internally-developed, proprietary software), the first question that must be asked is whether the transaction constitutes the sale of software or the sale of a service. Since prewritten software is taxable, and most services are not, how a transaction is characterized can have a tremendous effect on a taxpayer’s sales tax exposure. See Timothy P. Noonan and Joseph N. Endres, Taxation of



000160.01316 Business 10465842v4

Internet-Based Software Sales: Examining Recent Trends in New York, State Tax Notes (March 9, 2009).

B. Dating Services: Data or a Date?

1. In the People Resources case, the Tax Appeals Tribunal examined a dating service to determine whether a dating service was a taxable information service. Matter of SSOV ‘81 Ltd. d/b/a People Resources, D.T.A. Nos. 810966; 810967, N.Y. Tax App. Trib. (01/19/1995).

2. The Tribunal considered the primary function of the service. Was it to buy raw data or was it, really, to find a date?

3. The Tribunal explained that “[i]n order to determine a service’s taxability, the analysis employed by the New York courts and the Tax Appeals Tribunal focuses on the service in its entirety, as opposed to reviewing the service by components or by the means in which the service is effectuated.” Id.

4. The Tribunal continued, “[t]o neglect the primary function of petitioners’ business in order to dissect the service it provides into what appear to be taxable events stretches the application of [the sales tax] far beyond that contemplated by the Legislature.” Id.

5. Held: To find a date!

C. Apartment Search Service: Sales Tax to Go with That Broker Fee?

1. In the Principal Connections case, the Tax Appeals Tribunal considered an apartment search database to determine whether it was taxable as an information service. Matter of Principal Connections, LTD, D.T.A. No. 818212, N.Y. Tax App. Trib. (02/12/2004).

2. The Tribunal considered the primary function of the service. Was it to provide a public listing of apartments or was it to help match landlords and tenants?

3. The Tribunal rejected petitioner’s argument that the information was merely a means to its business of fostering business relationships, because petitioner also supplied information from non-members (i.e., public listings).

4. Tribunal analyzed People Resources case and stated:

“What distinguishes the nature of the services offered by People Resources and multiple listing services from those offered by PCL [petitioner] and the taxpayers in ADP Automotive Claims Services



000160.01316 Business 10465842v4

and Allstate Insurance Co. is that the data collected and furnished by People Resources and multiple listing services was used to foster transactions between its members or subscribers. These transactions were their primary purposes and the information was merely a means to achieve those ends. For the members of People Resources, information was furnished to induce members to date each other. The primary purpose of a multiple listing service, according to the Division, is commission sharing among listing and selling brokers.”

5. In contrast to People Resources, here the court concluded that the real estate listing service was merely furnishing information. The Tribunal stated:

“It is clear that PCL concentrated on obtaining and providing its subscribers with as broad a base of information as possible on available apartments in New York City. PCL did not, however, require nor expect that resultant rental or sale transactions would take place only between its members. Thus, its primary purpose was accomplished by furnishing information to its subscribers.”

6. Held: Taxable information service.

D. Check Verification: Risk Analysis or Raw Information?

1. In the TeleCheck Services case, an ALJ considered whether the service of providing check verification – a service that electronically analyzed the credit risk of accepting a customer’s check in payment for goods or services – constituted a taxable information service. Matter of TeleCheck Services, Inc., D.T.A. NO. 822275, N.Y. Div. of Tax., A.L.J. Determination (11/05/2009).

2. “[T]here is a distinction between a taxable information service and the furnishing of a nontaxable service where information is merely a component of that service.” (citing People Resources). Id.

3. “[T]o be an information service, the taxpayer must be in the business of furnishing information. As the Tribunal has stated, ‘the mere fact that information is being transferred will not create a taxable event.’” Id.

4. “Petitioner’s service undeniably involves the ‘furnishing of information,’ i.e., its communication as to whether to accept or reject a given check is, in fact, a piece of information. However, viewed in its entirety petitioner’s service principally involves giving advice, based on analysis, with respect to a particular transaction. That is, the primary function of petitioner’s service is to provide a recommendation or opinion based upon its sophisticated risk scoring analysis of the information provided to it (the



000160.01316 Business 10465842v4

check data), and in its possession … as to the likelihood that a particular check will or will not be honored.” Id.

5. Held: Nontaxable consulting service.

E. Scientific and Technical Consulting

1. Matter of NERAC, INC., D.T.A. No. 822568 (Div. Tax App. 07/15/2010).

2. Petitioner provided a scientific and technical consulting service.

3. “Turning to the primary question in this case, petitioner's service undeniably involves the “furnishing of information,” at least in a very literal sense. However, viewed in its entirety petitioner's service principally involves giving guidance and advice, based on analysis, with respect to a particular transaction, set of circumstances or discrete problem. That is, the primary function of petitioner's service is to provide a solution or resolution to a problem or to provide a course of action regarding a particular issue or question faced by a client. To be sure, petitioner's clients receive information, in the form of citations to scientific and technical papers, studies and reports derived from the Analyst's research efforts and in support of the Analyst's conclusions concerning resolution of the client's problem. However, to conclude that the client's receipt of information in this fashion is enough to make petitioner's business a taxable information service leaves the Analysts as mere conduits who simply find and funnel raw data or information to the clients. This view ignores the critical role of the Analysts and the value of their expertise, education and experience in the process of resolving clients' problems.”

4. Decision closely tracks TeleCheck determination.

F. The Department Seems to Reconsider Emphasis of Primary Function Test

1. When applying the primary function analysis to on-line services generally, the question should likely be whether, viewing the transaction as a whole, the consumer has intended to purchase a service or whether, in fact, he or she has intended to purchase the underlying software.

2. The Department, however, both in conducting audits and in issuing advisory opinions and other guidance, has begun to place less emphasis on the primary function test.



000160.01316 Business 10465842v4

3. TSB-M-10(7)S (07/19/2010)

a. This Technical Memorandum was intended “to clarify” the tax treatment of certain information services under sections 1105(c)(1) and 1105(c)(9).

b. Among other items, the Department has reconsidered dating services and seems to have ignored, Matter of People Resources, (which is a binding and precedential opinion of the Tribunal).

c. “A service is taxable as an information service if its primary function is one of the following: … matching or networking services (examples include online dating services, physician matching services, and contractor locator services), but not charges merely to post information.” Id. (emphasis added).

d. “The Tax Department will determine a service's primary function based on an examination of the nature of the service being sold and what is being paid for by the purchaser. How the buyer subsequently uses the information purchased is not relevant to this inquiry. If a customer's chief purpose in paying for a service is to receive information from that service, whether it is the price of a stock, the chain of ownership of real property, or contact information for a person meeting certain qualifications, the service as a whole qualifies as an information service. This result holds true even if the customer receives other benefits as part of the service.” Id.

4. TSB-A-10(50)S (10/14/2010)

a. This Advisory Opinion analyzed a merchandise return authorization service.

b. The Department considered the merchandise return authorization service to be similar in nature to check verification service: “The data is transmitted to Petitioner’s host server which issues an Authorization Decision to approve the return or exchange, similar to a credit card or check verification.” (emphasis added)

c. The Department concluded that the service was taxable: “Petitioner’s Authorization Service is an information service, because it compiles information about return behavior and provides a recommendation based on that information to its customers.” But see, TeleCheck, supra.



000160.01316 Business 10465842v4

VI. Taxation of The Internet A. Federal Internet Tax Freedom Act

1. Passed into law in 1998, Congress imposed a moratorium against the imposition of state and local taxes on internet access.

2. Internet Tax Nondiscrimination Act of 2003 – Extended the moratorium.

3. Internet Tax Freedom Amendments Act of 2007

a. Moratorium against state and local taxation extended through November 1, 2014.

b. In addition to extending the moratorium, the 2007 Act expanded the definition of “internet access” to include certain closely related services.

B. Protected from Taxation

1. Internet Access: A service that enables users to connect to the internet to access content, information, or other services offered over the internet. New York Technical Service No. TSB-M-08(4)C, 05/02/2008.

2. Telecommunications Used by an ISP: The purchase, use, or sale of telecommunications by a provider of an internet access service to the extent those telecommunications are purchased, used, or sold to provide that service or to otherwise enable users to access content, information or other services offered over the internet. Id.

3. Incidental Services: Services that are incidental to the provision of an internet access service when furnished to users as part of that service, such as:

a. a home page; b. electronic mail and instant messaging (including voice- and video-

capable electronic mail and instant messaging); c. video clips (e.g., movie previews and portions or short clips of a

complete video); and d. personal electronic storage capacity. Id.

4. Independent Services: A homepage, electronic mail and instant messaging (including voice- and video-capable electronic mail and instant messaging), video clips, and personal electronic storage capacity, that are provided independently or not packaged with internet access. Id.



000160.01316 Business 10465842v4

5. Example: Customer A purchases high-speed internet access service from Company X. In addition to the internet connection, this service includes the provision of electronic mail services, instant messaging and access to video clips. All of these services constitute internet access that is covered by the federal moratorium, and therefore they are not subject to New York State and local sales taxes (or to the telecommunications excise tax). Id.

C. Services ≠ Internet

1. Voice, Audio, Video Programming Utilizing Internet Protocol: “Internet access does not include voice, audio or video programming, or other products and services … that utilize Internet protocol or any successor protocol and for which there is a charge that is either separately stated or aggregated with the charge for those services.” New York Technical Service No. TSB-M-08(4)C, 05/02/2008.

2. VoIP Telephony: Any form of telephony (e.g., private telecommunications networks), including Voice over Internet Protocol (VOIP), network services and data transmission services -- other than telecommunications services used by an Internet Service Provider (ISP) to connect customers to the internet -- are not included under the federal moratorium. Accordingly, these forms of telephony continue to be subject to New York State and local sales taxes (and the telecommunications excise tax). New York Technical Service No. TSB-M-08(4)C, 05/02/2008.

D. Exemption Under New York Tax Law

1. Internet Access Service: “Receipts from the sale of internet access service, including start-up charges, and the use of such service, shall be exempt from the taxes imposed under [Article 28].” Tax Law § 1115(v).

2. Defined: “For purposes of this subdivision, the term ‘internet access service’ shall mean the service of providing connection to the internet, but only where such service entails the routing of internet traffic by means of accepted internet protocols. The provision of communication or navigation software, an e-mail address, e-mail software, news headlines, space for a website and website services, or other such services, in conjunction with the provision of such connection to the internet, where such services are merely incidental to the provision of such connection, shall be considered to be part of the provision of internet access service.” Tax Law § 1115(v).



000160.01316 Business 10465842v4

VII. Taxation of Cloud Computing What is cloud computing? Is it software or a service? Is the sale of a book delivered electronically a taxable sale of tangible personal property or an information service? When software or information is delivered or accessed by electronic means when is it a New York sale for sales and use tax purposes?

A. “Service” or “Prewritten Software”?

1. As a general proposition, in New York, the Tax Law broadly imposes a sales tax on sales of tangible personal property – essentially, physical objects. Tax Law § 1105(a).

2. By statute, tangible personal property includes pre-written or “canned” software, for example store bought tax preparation software. Tax Law § 1101(b)(14).

3. In contrast to sales of tangible personal property, the Tax Law imposes a sales tax only on the sale of a limited class of services. If a service is not explicitly enumerated in the statute, then the sale of that service is not subject to tax. Tax Law § 1105(c).

B. Policy Shift

1. Prudent businesses serving consumers in New York over the internet should be cognizant that they may be engaging in transactions that, as far as the Department is concerned, require them to collect and remit sales tax.

2. Many new and traditional services are being offered to consumers on-line, necessarily involving the use of computers and software. The Department has begun to recast those transactions from the sale of a service (likely nontaxable) into the sale of pre-written software (taxable).

3. Activities that in 2006 were considered by the Department to be tax-free services are now regularly being treated as subject to tax. Compare In re Tower Innovative Learning Solutions, Advisory Opinion, TSB-A-06(5)S (02/02/06) (online education services not taxable); with In re SkillSoft Corporation, Advisory Opinion, TSB-A-09(3)S (01/29/2009) (online education services taxable); and In re MindLeaders, Inc., Advisory Opinion, TSB-A-09(2)S (01/21/09) (same).

C. Transfer of Possession or Control

1. In place of the primary function test, the Department has begun to relay on its regulations to determine whether there has been a taxable sale of software. Let’s examine how the Department gets there.



000160.01316 Business 10465842v4

2. Under the Tax Law, a “sale” is defined to include a “rental, lease or license to use or consume” tangible personal property. Tax Law § 1101(b)(5).

3. The applicable regulations provide that the phrase “rental, lease and license to use” refers to a transaction in which there is a “transfer of possession” of tangible personal property (but not a transfer of title) in exchange for consideration. 20 N.Y.C.R.R. § 526.7(c)(1).

4. The regulations further provide that a “transfer of possession” with respect to a “rental, lease or license to use” “means that one of the following attributes of property ownership has been transferred:

a. custody or possession of the tangible personal property, actual or constructive;

b. the right to custody or possession of the tangible personal property; or

c. the right to use or control or direct the use of tangible personal property.” 20 N.Y.C.R.R. § 526.7(e)(4).

D. Sufficient Transfer of Possession or Control?

1. Granting a license to use pre-written software – provided there is a sufficient transfer of possession – constitutes a taxable sale of tangible personal property.

2. The problem lies in determining precisely what constitutes a transfer of possession pursuant to a license to use pre-written software. Under the Department’s interpretation of its own regulations, constructive possession or the right to use or direct the use of the software are sufficient to constitute a transfer of possession.

3. But under what precise circumstances does a consumer actually acquire a right to use the service provider’s software sufficient to convert the sale into a sale of software? The Department has begun to interpret these provisions as broadly as possible with the effect of dramatically expanding the tax base.



000160.01316 Business 10465842v4

E. Case Study #1: Matter of Electronic Mortgage Affiliates, Inc., TSB-A-09(15)S (04/15/2009).

1. The Department’s position is well illustrated by examining the administrative guidance it has been issuing to taxpayers in the past few years or so.

2. In one advisory opinion (“Electronic Mortgage”), the Department examined a service provider that provided online mortgage loan origination and processing services. Traditionally, this type of work would have required an office visit or a telephone call. Now-a-days, it can be conducted entirely on-line.

3. Essentially, the service provider, for a subscription fee, assisted mortgage brokers to match their customers with loan products offered by various lenders; to prequalify their customers for eligible loan products; and to obtain necessary disclosure forms. The service provider and the mortgage brokers entered into subscription agreements that, in part, granted a non-exclusive, non-transferable, limited license to access and use the service provider’s website.

4. Naturally, because the service provider furnished its service over the internet, by definition some degree of computer hardware and software were necessarily involved in providing the service. On this basis, the Department determined that the consumers were licensing pre-written software – taxable – as opposed to purchasing mortgage lending services – non-taxable.

5. The Department stated: “The accessing of Petitioner’s software by Petitioner’s subscribers constitutes a transfer of possession of the software, because the subscriber gains constructive possession of the software and gains the ‘right to use, control or direct the use’ of the software. Although Petitioner’s contract with its subscribers characterizes its product as a ‘service,’ and states that the subscriber does not have the right to ‘alter, change, or control’ the software, this characterization is not controlling. Petitioner’s subscribers have the right to access the software in order to determine loan eligibility, ascertain the availability of certain loan products, and generate forms. This is true even if no ‘copy’ of the software is transferred to the subscriber.”

6. Accordingly, the consumer’s ability to “access” the service provider’s software was considered by the Department to be sufficient. Consequently, many businesses, such as Electronic Mortgage Affiliates, Inc., that provide on-line services to consumers located in New York should be aware that the Department may consider them to be responsible for collecting and remitting sales tax on transactions that, until recently, they likely had no reason to suspect would be considered as taxable.



000160.01316 Business 10465842v4

F. Case Study #2: Matter of XYZ Corp., TSB-A-09(8)S (2/2/2009)

1. The Department’s position is well illustrated by examining an advisory opinion issued to XYZ Corp. (“XYZ”). In that advisory opinion, the Department analyzed the sales tax treatment of a company that provided internet-based financial transaction settlement services.

2. Essentially, the service provider offered two different products that facilitated the settlement of transactions in the primary and secondary syndicated bank loan market.

3. With the first product, buyers and sellers of a certain type of financial security provided their respective information to the service provider, and the service provider entered that information into its platform and subsequently prepared the necessary contracts and documentation to fulfill and close the transaction between buyer and seller.

4. The second product was substantially similar. Except the parties had the option of establishing a data link and inputting over the internet their own information on the service provider’s platform as opposed to providing the information to XYZ for XYZ to input the information.

5. With respect to the first product, the Department concluded as follows: “The first product described above does not constitute the sale of pre-written computer software, because the subscriber does not obtain constructive possession or the right to use or control the software. XYZ maintains control over the software and inputs all of the information provided by the subscriber.”

6. Accordingly, there was not a transfer of constructive possession over the software, because the service provider maintained control over and it input all of the information itself.

7. With respect to the second product, however, the Department concluded just the opposite, stating as follows: “However, with the second product, the subscriber has the option of obtaining a data link to input all of its own information and to generate and obtain spreadsheets and reports. This option, whether or not exercised, provides the subscriber with the right to control the software sufficient to constitute a taxable sale.”

8. Accordingly, because the service provider enabled the consumer to enter his or her own information into the computer system over the internet, the service provider had apparently ceded constructive possession over its computer software to the consumer to such a degree that the transaction constituted a taxable license to use pre-written software (and not a sale of a non-taxable financial transaction fulfillment service). The implications of such an interpretation are far reaching.



000160.01316 Business 10465842v4

G. Case Study #3: On-Line Educational Instruction

1. For an interesting comparison of the sales tax treatment of two on-line educational courses, compare Matter of Tower Innovative Learning Solutions, Inc., TSB-A-06(5)S [on-line course held to be an educational service where the course provided through remotely accessed software, along with academic support in the form of the provision of answers to students’ questions, an online discussion forum, and coordinated group projects] with MindLeaders, Inc., TSB-A-09(2)S [an on-line course, determined by the Department, to be provided exclusively through remotely accessed software without any academic support and held to be taxable as prewritten software].

H. Guidelines for Determining Taxability

1. Below are a few factors that should be considered when determining whether a transaction constitutes the taxable sale of software or the nontaxable sale of a service.

2. Does the customer receive a copy of or have access to the software? If so, the transaction is not automatically taxable, but it will be more difficult to prove that the transaction is a nontaxable service. If the customer does not have access to or “touch” the software, then it is unlikely that a taxable sale of software has occurred and the seller is probably using the software to perform a service. To put it a different way, is the seller using the software to provide a nontaxable service? Or is the seller licensing the software to the purchaser for the purchaser’s own use?

3. Here’s another way to look at this: can the taxpayer buy the software without any additional services? In other words, could the software be a stand-alone product?

4. Can the customer directly change any of the parameters on the software, controlling how the software functions? If so, it is more likely that the transaction would constitute a taxable purchase of software.

5. Pay attention to the language in the sales contract. Though this language is not controlling, how the parties characterize the transaction is still an important aspect of the analysis. When no software is transferred to the purchaser, the seller should avoid characterizing the transaction as a sale or license to use software.

6. Make sure marketing language on websites, brochures, etc. accurately describes the transaction. If no software is transferred to the purchaser, this material should avoid characterizing the transaction as a license to use software.



000160.01316 Business 10465842v4

7. Once a contract is executed, ask whether the purchaser can use the software to complete the transaction without any additional activity by the seller. If so, the software appears to be the focus of the transaction. If the seller brings expertise to the transaction apart from the software, or otherwise is required to perform further services to satisfy its contractual obligation to the purchaser, then the transaction looks more like a sale of a service.

8. Though the Tax Department seems to be moving away from a “primary function” analysis, taxpayers should keep this test in mind when evaluating the taxability of the transaction.

I. Below is a review of recent case law and advisory opinions addressing software-based transactions:

1. Ernst & Young LLP - The taxpayer sold internet filtering services that employers could purchase to restrict their employees’ access to the internet. The software-based service updated nightly to keep its list of acceptable and restricted websites current. The Tax Department determined that this was a taxable sale of prewritten computer software because the software was transferred to the customer. Moreover, the customer established policies that the software would use when controlling internet access. Thus, the customer, rather than the seller, used the software in performing the internet access services. TSB-A-03(28)S (June 24, 2003).

2. Voicemate.com, Inc. - The taxpayer used software to provide end-to-end services that helped businesses instantly publish, manage and deliver branded, personalized information to their customers over mobile phone, PC, or hand-held devices. The ALJ determined that the taxpayer was using the software to provide a service rather than selling the software itself. A key point here was that the customer could not access the software and it was not loaded onto the customer’s servers or computers. Matter of Voicemate.com, Inc., Administrative Law Judge (June 2, 2005).

3. Icor Systems, LLC – The taxpayer created “Internet Cafes” where customers could buy time on a computer to access the internet. For a basic fee, customers could surf the web, access email and view documents in Microsoft Word, Excel, or PowerPoint viewers. Customers using the basic services could not edit documents using these programs. Customers who paid a premium in addition to the basic fee were allowed access to the Microsoft programs to edit documents. The Tax Department determined that the basic plan was a nontaxable internet access service. However, the premium charge represented a taxable sale of prewritten computer software. TSB-A-08(47)S (Oct. 16, 2008).



000160.01316 Business 10465842v4

4. KPMG LLP – In this advisory opinion, the taxpayer sold automated voice messaging services. It used specialized software to make phone calls and deliver an automated voice message (e.g., flight information to airline customers, bill pay notifications to credit card holders, telemarketing services, etc.). The Tax Department concluded that the taxpayer was selling a nontaxable service because the software was not transferred to the customer and the customer was not able to access the software. TSB-A-09(5)S (Jan. 29, 2009).

5. Voice-Messaging Service – Software used to provide various information to people (e.g., due dates for bills, flight changes, emergency situations, etc.) did not constitute the taxable sale of software. TSB-A-09(14)S (Mar. 13, 2009).

6. Matter of DZ Bank – The Tax Appeals Tribunal overruled an administrative law judge who concluded that 3 out of 4 software-based portfolio management products were taxable as sales of prewritten software. The Tribunal concluded that all 4 products were taxable. Matter of DZ Bank, Tax App. Trib. (May 11, 2009).

7. Jeffrey J. Coren CPA, P.C. – Software-based platform that provides retailers with weekly markdown recommendations based upon weekly sales data supplied by the retailer was deemed to be taxable prewritten software. TSB-A-09(19)S (May 21, 2009).

8. On-Demand TMS System – A software-based logistics management platform that provided customers with the ability to view their complete supply chain and private transportation systems via the internet was taxable as prewritten computer software. TSB-A-09(33)S (Aug. 13, 2009).

9. National Football League – Software-based payroll check processing and data management services are taxable as sales of prewritten computer software. TSB-A-09(37)S (Aug. 25, 2009).

10. Insurance Services – A software-based platform sold to insurance companies to automatically provide rate quotes, insurance contracts, and other insurance documents to insureds and prospective insureds was deemed to be taxable prewritten computer software. TSB-A-09(41)S (Sept. 22, 2009).

11. Real Estate Website Functionality – Application service provider fees that afforded a real estate company’s website greater functionality (provides searchable databases with additional information) were taxable as sales of prewritten computer software. TSB-A-09(44)S (Sept. 24, 2009).



000160.01316 Business 10465842v4

12. On-Line Auction – In this opinion, registration charges for participation in an online auction site were not subject to tax as either a purchase of prewritten software or taxable information services. TSB-A-09(52)S (Nov. 13, 2009).

13. Computer Video Games – Fees for customers to use the taxpayer’s computer equipment and play computer games at its facility are subject to sales tax. TSB-A-10(2)S (Jan. 20, 2010).

14. Data Mining/Data Warehousing and Online Advertising Services - Software that tracks usage of a customer’s website, including the number of visitors per webpage, the time of day the most website “hits” occur, and how long each visitor remained on the site, was not deemed to be taxable. Nor was the report detailing the website usage taxable as an information service. Despite the fact that customers entered into “licenses to use” the software, customers could not purchase the software separately and had no right to use or control the software. Rather, the software was simply embedded in the customer’s website and collected data. TSB-A-10(6)S (Feb. 17, 2010).

15. Automatic Speech Application Programs – Speech applications that automate virtually any type of call, including natural language call-routing, self-service transactions and product support were deemed to be taxable sales of software. One example of the taxpayer’s service involves a client that wants to be able to verify warranty information to its customers, including the expiration date. TSB-A-10(10)S (Mar. 16, 2010).

VIII. Software As A Service – A Survey of Several States A. Software As A Service (SaaS)

1. Essence of the “cloud computing” arrangement is that for a fee, usually recurring, a provider allows a customer access, usually through the internet, to a server over which the provider retains control.

2. The customer makes use of the server in one of a variety of ways:

a. SaaS: As a portal capable of accessing a service, perhaps to process the customer’s data.

b. IaaS: As hardware on which to run programs or store data.

c. PaaS: As a platform on which to develop its own software.



000160.01316 Business 10465842v4

d. Other phrases used to refer to one or all of these arrangements include “Application Service Provider,” remotely-accessible software, and, of course, “cloud computing.”

3. States have taken a variety of different approaches; mostly regulatory rather than statutory, to taxing cloud computing and software as a service. States that don’t tax electronic sales of software generally do not tax SaaS services; while those that do tax electronic sales of software have taken several positions, discussed below.

B. State Survey

1. California – Not Taxable. California regulations exclude electronic transfers of software from sales tax as long as the customer does not obtain tangible property, like storage media. The State Board of Equalization recently attempted to take a more aggressive position on software issues, but the state Court of Appeals rejected their efforts. Accordingly, SaaS transactions are likely not subject to sales tax in California.

2. Connecticut – Unclear. Interpreting state statutes, the Connecticut Department of Revenue has laid out three categories of software transactions: 1) sales of prewritten software, subject to sales and use tax; 2) “Computer and Data Processing,” taxed at a lower rate; and 3) the “development, hosting, or maintenance” of a website, not subject to tax. An argument could be made for including SaaS transactions in any of these categories, so the exact tax impact on any given transaction is not entirely clear. Careful decisions in drafting contracts and formulating billing arrangements may be particularly helpful to SaaS providers in Connecticut.

3. Florida – Not Taxable. The Florida Department of Revenue has stated that transfers of “electronic images which appear on the subscriber’s video display screen” are not taxable, including most transfers of information over the Internet. In advisory opinions, the Department has specifically indicated that licenses to use or access software over the Internet are not taxable, as long as no tangible personal property is transferred. Accordingly, SaaS transactions are not subject to sales tax in Florida.

4. Georgia – Not Taxable. Georgia regulations exclude electronically delivered software from the state’s definition of tangible personal property, so as long as the electronic nature of a transaction is documented, the transaction will not be subject to sales tax. State regulations also exempt “computer-related services.” Given these overlapping exemptions, SaaS transactions clearly would not be subject to sales tax in Georgia.



000160.01316 Business 10465842v4

5. Illinois – Unclear. Illinois taxes all software sales, but exempts software licensing. There are five requirements to use the exemption, and the Department of Taxation has recently emphasized that failure to strictly abide by all the requirements renders a transaction taxable. In particular, the requirement for a contract with written signatures could trip up SaaS providers, especially in smaller transactions for which a clickthrough agreement might be the standard. The Department of Taxation has also indicated that it is considering rulemaking in this area in the near future. Accordingly, Illinois’ position on taxing SaaS transactions appears unsettled.

6. Indiana – Taxable. Indiana law imposes sales tax on electronic transfers of software, and the Indiana Department of Revenue has stated that any transaction in which customers gain the right to use, control or direct software, even on a remote server, is such a taxable transfer. In advisory letters, the Department has specifically held “cloud computing” arrangements taxable, unless the taxpayer can prove receipt of no tangible personal property.

7. Massachusetts – Likely Taxable. The Massachusetts Department of Revenue has issued a regulation stating that electronic software transfers are taxable, including “transfers of rights to use software installed on a remote server,” and has applied this language to SaaS transactions. However, the Department has also refrained from taxing some electronically provided services, even when the parties used the term SaaS in referring to their agreement. It is unclear exactly where the Department draws the line between taxable transfers of control over software and nontaxable online services, so consultation with the Department may be required for any individual SaaS provider.

8. Michigan – Unclear. The Michigan Department of the Treasury taxes all software sales, including electronic transfers, and officials have indicated in private correspondence that licenses to use software on a remote server are taxable. However, the Michigan Supreme Court also overruled the Department in one case, describing as a service rather than a taxable sale a coupon delivery system involving client stations, network communications, and a centralized provider database. Additionally, the state Senate has passed bills exempting SaaS transactions, though the House of Representatives has not acted on them. Given the Department’s lack of public statements on SaaS, the courts’ willingness to override the Department, and the possibility of statutory change, the taxability of SaaS transactions in Michigan appears an unsettled issue.

9. Minnesota – Not Taxable. Minnesota has passed a statute imposing tax on all sales of software regardless of the delivery method. However, an existing regulation specifically exempts “[t]he making available of a



000160.01316 Business 10465842v4

computer on a time-sharing basis for use by customers securing access by remote facilities,” and this exemption has been understood to apply to SaaS transactions. Governor Dayton proposed repealing this rule in his 2012–2013 budget, and bills to that effect were introduced in both houses of the legislature, but they were not acted upon. Accordingly, at least for the moment, SaaS transactions are likely not subject to sales tax in Minnesota.

10. New Jersey – Unclear. A 2006 New Jersey statute imposed taxation on a broad range of transactions, and taxation of SaaS seemed likely when the Department described “application service provider” transactions as “license[s] to use prewritten computer software delivered electronically” and electronic delivery of software as a taxable sale. However, a later Tax Note retracted the former description and described “application service provider” transactions without commenting on their taxability. Accordingly, it is not clear if the Department now views SaaS transactions as taxable software transfers. If it did, the use of the “software” exclusively within the customer’s “business, trade, or occupation” would exempt the provider from taxation.

11. New York – Taxable. New York’s broad statute imposes sales tax on transfers of prewritten computer software regardless of how the customer gains access to the software. Under this authority, the Department of Taxation and Finance has explicitly stated that “application service provider” arrangements transfer control of software and are therefore subject to sales tax. But, the Tax Department has seemingly taken a different position in earlier advisory opinions. And, we know of several cases currently pending where taxpayers are challenging the Department’s position. So, stay tuned on.

12. North Carolina – Unclear. North Carolina in 2010 passed a law taxing software purchases regardless of the means of delivery. However, the statute contained exemptions for 1) software designed to run on an “enterprise operating system” and 2) software sold to “a person who operates a datacenter” and used within the datacenter. These exemptions seem to apply to SaaS; in particular, SaaS software will almost certainly run on most enterprise operating systems. However, such broad exemptions cut against the clear intent of the statute to expand tax liability. Therefore, absent clarification, it is not clear whether SaaS transactions are taxable in the state.

13. Ohio – Likely Taxable. Ohio law states that “automatic data processing or computer services . . . provided for use in business” are subject to sales tax. In MIB, Inc. v. Tracy, the Ohio Board of Tax Appeals considered an arrangement in which customers used various means, including computers, to connect to a series of computers at a provider, receiving



000160.01316 Business 10465842v4

back specialized reports containing the provider’s own data. The Board unanimously found this arrangement taxable, because “the [customer’s] computers . . . worked in direct concert with the [provider’s computers] to provide that [customer] with access to the information sought by that [customer]”. By the same token, the computers of customers in most SaaS arrangements work in concert with the provider's servers to provide access to at least some new information sought by those customers. Accordingly, it seems that SaaS transactions are probably taxable in Ohio.

14. Pennsylvania – Taxable. While Pennsylvania’s statute does not actually include software within its definition of tangible personal property, state courts have recently ruled that the definition includes software by implication. Under this authority, the Pennsylvania Department of Taxation directly addressed SaaS in a May 31, 2012 letter ruling. Changing its previous position, the Department stated that because the customer in a SaaS transaction receives a “license to use,” as well as “control or power over the software,” such transactions were taxable sales under state statute.

15. Puerto Rico – Unclear. Puerto Rico’s first sales and use tax took effect in 2007. The statute and the regulations implementing it explicitly include “computer programs” within the definition of tangible personal property and define licenses to use as sales. This language certainly makes taxation of SaaS transactions a possibility. However, the Departamento de Hacienda has been focused on implementing the new tax on the more common physical sales, and has not directly addressed the question of SaaS, so there is no final answer as yet.

16. Texas – Taxable. Texas statute mandates the taxation of “data processing services.” The Comptroller of Public Accounts has interpreted the statutory language broadly, including “software as a service” and “application service provider” arrangements, even where they do not provide unique data to the customer. Given this guidance, SaaS transactions are clearly taxable in Texas.

17. Virginia – Not Taxable. Virginia’s taxing statute does not apply to electronic sales of software. Accordingly, the Tax Commissioner does not impose sales tax on such transactions as long as providers document the delivery method. As Virginia does not impose a tax on electronic information services either, SaaS transactions are not subject to taxation in Virginia.

18. Washington – Taxable. A 2009 Washington law imposed sales tax on all transfers of software regardless of the method of delivery. Under this authority, the Washington Department of Revenue issued a regulation setting forth a taxable category of software called “remote access



000160.01316 Business 10465842v4

software,” which explicitly includes “application service provider” arrangements, though the exact rate at which these arrangements would be taxed is not entirely clear.

19. Commentary. As can be seen, almost every state has a different answer, or has arrived at an answer in a different way. As even more states consider expanding their tax bases to cover SaaS transactions, the need for professional advice will only deepen.

IX. Taxation of Information Services A. Information Services: Tax Law § 1105(c)(1):

1. Defined: “The furnishing of information by printed, mimeographed or multigraphed matter or by duplicating written or printed matter in any other manner, including the services of collecting, compiling or analyzing information of any kind or nature and furnishing reports thereof to other persons …”

2. Essentially, the service of:

a. Furnishing printed, mimeographed, or multigraphed information, and/or

b. Collecting, compiling, or analyzing information of any kind or nature and the furnishing of reports thereof to other persons. Tax Law § 1105(c)(1); 20 N.Y.C.R.R. § 527.3(a)(1)-(2).

3. Similarly, section 1105(c)(9) imposes a tax upon receipts from every sale, except for resale, of an information service that is provided through telephony.

B. The Business of Furnishing Information. “As the statute and implementing regulations … indicate, it is the sale of the service of furnishing information by a business whose function it is to collect and disseminate information which is taxable under Tax Law § 1105(c)(1) and not the mere sale of information.” Audell Petroleum Corp. v. New York State Tax Comm’n, 69 N.Y.2d 818, 819-20, 513 N.Y.S. 2d 962, 963 (1987) (emphasis added); see also Goldman v. Comm’r, 128 A.D.2d 1014, 513 N.Y.S.2d 552 (3d Dep’t 1987) (same).

1. Is this a vendor who is “selling the service of furnishing information?”

2. Is this a vendor “whose function it is to collect and disseminate information?”

3. Or, is this a vendor that merely uses information in the process of providing a service?



000160.01316 Business 10465842v4

C. “Among the services which are information services are credit reports, tax or stock market advisory and analysis reports and product and marketing surveys.” 20 N.Y.C.R.R. § 527.3.

D. Statutory Exclusions

1. Statute contains four exclusions:

2. Personal and Individual Exclusion: “…but excluding the furnishing of information which is personal or individual in nature and which is not or may not be substantially incorporated in reports furnished to other persons …” Tax Law § 1105(c)(1).

3. Advertising Services Exclusion: “…and excluding the services of advertising or other agents, or other persons acting in a representative capacity.” Tax Law § 1105(c)(1).

4. Use by Media Exclusion: “…and excluding … information services used by newspapers, electronic news services, radio broadcasters and television broadcasters in the collection and dissemination of news.”

5. Meteorological Services Exclusion: “…and excluding meteorological services.” Tax Law § 1105(c)(1).

6. It is well settled that “[w]here an exclusion from taxability is involved, it must be strictly construed in the taxpayer’s favor.” Towne-Oller and Assoc., Inc., v. State Tax Comm’n, 120 A.D.2d 873, 874, 502 N.Y.S.2d 544, 545 (3d Dep’t 1986).

E. Personal and Individual Exclusion:

1. “…but excluding the furnishing of information which is personal or individual in nature and which is not or may not be substantially incorporated in reports furnished to other persons …” Tax Law § 1105(c)(1).

a. First, the information must be personal or individual in nature.

b. Second, the information is not, or may not, be substantially incorporated in reports furnished to others.

i. See Taxability of Certain Laboratory Reports, TSB-M-95(8)S (1995), wherein the Department considered whether receipts from the sale of laboratory reports by an environmental consulting firm were excluded under section 1105(c)(1). The firm conducted a scientific analysis of



000160.01316 Business 10465842v4

certain environmental samples and then prepared laboratory reports discussing its results.

ii. The Department stated “[t]o the extent that the report pertains only to the samples tested, the information in the report is personal or individual in nature.” Id. It continued, “[a]s long as the information contained in the report is not given to persons other than the customer or the customer’s designee, the information is not given to others.” Id. Thus, receipts from the sale of the laboratory reports were not subject to sales tax.

2. Common Database.

a. In examining whether information is personal and individual, courts often consider the source of the information that is furnished.

b. Where the source is a widely accessible or publicly available database, then the information may not be considered sufficiently personal or individual. See, e.g., Twin Coast Newspapers, Inc. v. State Tax Comm’n., 101 A.D.2d 977, 977, 477 N.Y.S.2d 718, 719 (3d Dep’t 1984) (holding that receipts from the sale of certain reports reproducing statistical data that was extracted from other sources that were “available to everyone” were not excluded); Rich Products Corp. v. Chu, 132 A.D.2d 175, 178, 521 N.Y.S.2d 865, 867 (3d Dep’t 1987) (holding that receipts from the sale of certain reports that were “customized in some respects” but that reproduced information that came from a “single data repository which itself is not confidential and is widely accessible” were not excluded); ADP Automotive Claims Servs v. Tax Appeals Tribunal, 188 A.D.2d 345 (3d Dep’t 1993) (holding that receipts from sale of auto body repair estimates, prepared using a common database, were taxable as an information service).

3. Example from the Regulations. The regulations state: “[a] computer service company owns a service program consisting of analyses of law cases and statutes. It is asked by a customer to research all references to the word ‘assessment.’ The fee for the printout received by the customer constitutes a taxable receipt from an information service, as the citations listed may be given to another subscriber requesting the same information.” 20 N.Y.C.R.R. § 527.3(a), ex. 4.

a. In this example, the computer service company is providing the underlying information (e.g., statutes, case law, and rulings, not legal advice). The information is not personal or individual in nature. Consequently, the attorney who purchases and uses the



000160.01316 Business 10465842v4

information service must pay sales tax on that purchase, but there is no tax due when that attorney receives a fee for providing his or her client with legal advice based on that information.

F. Matter of TeleCheck Services, Inc., D.T.A. # 822275 (Div. of Tax, Nov. 5, 2009).

1. In this case, an administrative law judge examined whether a service that electronically analyzed the risk of accepting a check (i.e., likelihood of payment on the check) qualified as a taxable information service.

2. The ALJ concluded that the primary function of the taxpayer's service was not to disseminate information, but rather was the provision of advice on whether to accept a check as payment. In other words, the service allowed the sellers to know whether a potential transaction was risky.

3. TeleCheck, itself, purchased and collected data, it stored data, and it used data in performing its analysis, but its clients and customers did not have access to, or receive, any of that underlying data. Rather, TeleCheck rendered an expert opinion, and the customers received only that opinion.

G. TSB-M-10(7)S (07/19/2010)

1. This TSB-M “clarified” that employment and dating database services would be taxable as an information service if their primary function was the furnishing of information.

2. It also clarified that the sale of title abstracts to real property were taxable as an information service, as were “risk management analysis reports” (e.g., “[a] service that relies on statistical models and historical data to generate a report analyzing and forecasting the risks associated with various aspects of a client’s business.”).

3. This latter policy reversed the result in the RiskMetrics Group LLC advisory opinion. See TSB-A-00(2)S.

H. Newspapers, Periodicals and Newsletters. – Exempt.

1. Newspapers and periodicals clearly contain information. But do they qualify as information services? No.

2. Newspapers and periodicals, including certain newsletters, printed in paper format are exempt from sales tax. N.Y. Tax Law §1115(a)(5). The exemption has been extended to copies delivered electronically, provided that the digital version is identical in content to the paper version, with the exception of advertisements.



000160.01316 Business 10465842v4

3. Newspapers: To qualify as an exempt newspaper, the publication must conform generally to the following requirements:

a. it must be published in printed or written form at stated short intervals, usually weekly or daily;

b. it must not, either singly or, when successive issues are put together, constitute a book;

c. it must be available for general circulation to the public; and

d. it must contain matters of general interest and reports of current events. 20 N.Y.C.R.R. § 528.6(b)(1).

4. Periodicals: To qualify as an exempt periodical, the publication must conform generally to the following requirements:

a. it must be published in printed or written form at stated intervals, at least as frequently as four times a year;

b. it must not, either singly or, when successive issues are put together, constitute a book;

c. it must be available for circulation to the public;

d. it must have continuity as to title and general nature of content from issue to issue; and,

e. each issue must contain a variety of articles by different authors devoted to literature, the sciences or the arts, news, some special industry, profession, sport or other field of endeavor. 20 N.Y.C.R.R. § 528.6(c)(1).

5. Newsletters: To qualify as an exempt periodical, a newsletter must conform to the above requirements for a periodical. A newsletter that has no signed articles, but has a staff of writers who originally prepare articles, will be considered to have articles by different authors. 20 N.Y.C.R.R. § 528.6(c)(2).

I. Electronic News Services and Electronic Periodicals

1. 2011 legislation (Chapter 583) created a new exemption, found in Tax Law § 1115(gg), for electronic news services and electronic periodicals. Pertinent definitions can be found in Tax Law §§ 1101(b)(37) and (38).

2. This new exemption is in addition to the limited exemption for electronic newspapers and electronic periodicals, found in Tax Law § 1101(b)(6).



000160.01316 Business 10465842v4

J. E-Books – not taxable

1. New York Technical Service No. TSB-M-11(5)S, 04/07/2011; New York Advisory Opinion TSB-A-11(20)S, 07/08/2011.

a. Addresses whether the sale of a book delivered electronically (i.e., an “e-book”) is the sale of an information service subject to sales tax under Tax Law § 1105(c)(1).

b. Current policy, until further notice, the sale of an e-book does not constitute the sale of a taxable information service provided the e-book meets all of the following conditions:

i. the purchase of the product does not entitle the customer to additional goods and services and any revisions done to the e-book are for the limited purpose of correcting errors;

ii. the product is provided as a single download;

iii. the product is advertised or marketed as an e-book or a similar term;

iv. if the intended or customary use of the product requires that the product be updated or that a new or revised edition of the product be issued from time to time (e.g., an almanac), the updates annually; and

v. the product is not designed to work with software other than the software necessary to make the e-book legible on a reading device (e.g., Kindle, Nook, iPad, iPhone or personal computer).

c. “The policy discussed in this memorandum is limited to products that are not, or do not include, prewritten computer software or any other product that constitutes tangible personal property as defined in section 1101(b)(6) of the Tax Law.” TSB-M-11(5)S (emphasis added).



000160.01316 Business 10465842v4

X. Nexus Issues To be subject to New York’s Sales and Use Tax, two broad requirements must be met. The first is “nexus,” which requires a Constitutional analysis. The second is status as a “vendor,” which requires a statutory analysis.

A. Nexus Generally

1. Unlike federal tax, not every taxpayer engaging in business within the US is subject to taxation by the 50 different states.

2. In order to promote a national economy, US Constitution imposes limitations on states ability to impose tax on out-of-state entities.

3. Before a state can impose tax, an entity must first have NEXUS.

4. Nexus refers to the nature and frequency of contacts with a state, before a state can impose tax obligations.

5. Think Civil Procedure – Nexus means minimal contacts.

B. U.S. Constitution

1. Nexus is rooted in TWO clauses of the US Constitution

a. FIRST: Due Process Clause – life, liberty and property

i. Mobile Oil Corp. (1980) – US Supreme Court said that a tax satisfies Due Process Clause if two requirements:

1) some definite link or minimum contact between the taxing state and the taxed entity, person or transaction

2) rational relationship between the tax collected and the values afforded by the state

b. SECOND: Commerce Clause

i. Complete Auto Transit (1977) – US Supreme Court said that a tax satisfies CC if four elements are present

1) Tax is applied to an activity with substantial nexus with taxing state

2) tax is fairly apportioned

3) tax does not discriminate against I/S commerce



000160.01316 Business 10465842v4

4) tax is fairly related to the services provided by taxing state

ii. MUST HAVE SUBSTANTIAL NEXUS

C. Quill Corporation (1992) – US Supreme Court Examined Nexus

1. Mail order company, outside of ND, but sending catalogues into ND and soliciting sales from ND customers

2. Issue: Whether the out-of-state company could be required to collect ND use tax

3. Two Different Nexus Standards – Court differentiated between nexus under Due Process and nexus under Commerce Clause

4. Held:

a. Physical presence in Taxing State is NOT required for Due Process Nexus

b. Physical presence in Taxing State IS required for Commerce Clause Nexus -- bright line rule

D. Physical Presence Requirement – Type of Tax Matters

1. Quill dealt with sales and use taxes, not corporate income taxes

2. Since Quill, states have tried to limit the physical presence requirement only to sales and use taxes; meaning an economic presence alone is sufficient to impose an income tax as opposed to sales tax

E. How Much Physical Presence is Required??

1. Bright Line Rule: Physical presence requirement sets forth a bright line rule – or does it?

2. Orvis Co., Inc. v. Tax App. Trib., 86 N.Y.2d 165 (N.Y. 1995).

a. Issue: Whether Orvis, an out-of-state Vermont business that sold camping, fishing and hunting equipment, and casual and outdoor clothing almost entirely through mail order sales to New York residents for use in New York, was liable to collect New York’s compensating use tax on its sales?

b. Substantial nexus does NOT require “substantial” physical presence.



000160.01316 Business 10465842v4

c. Rather, it must be demonstrably more than the “slightest” presence. (National Geographic v California Equalization Bd., 430 U.S. 551, 556 (1977)). And, it may be manifested by the presence in the taxing State of the vendor’s property or the conduct of economic activities in the taxing State performed by the vendor’s personnel or on its behalf.

3. Thus, in New York, the in-state presence of an out-of-state vendor’s:

a. Property; or

b. Employees; or

c. Agents acting on the vendor’s behalf

within the state could constitute the necessary physical presence.

4. In Orvis, the out-of-state vendor periodically sent salesmen, who resided in Vermont, into New York to call on non-Orvis owned stores to solicit sales. During the audit period, the record disclosed that Orvis’ annual sales to New York customers varied from $ 1 million to $ 1.5 million, about 15% of which consisted of wholesale purchases made by from 9 to 16 unaffiliated New York retail establishments.

5. According to the Orvis majority, “[t]he foregoing evidence supported a reasonable inference by the Tax Appeals Tribunal that Orvis’ substantial wholesale business in this State was generally accomplished by means of its sales personnel’s direct solicitation of retailers through visits to their stores in New York, subject only to approval of all orders in Vermont…”

6. In Orvis, the company did not maintain, lease or own any office, distribution house or any other place of business in New York; nor did it own any tangible property, real or personal in New York; nor did it have a telephone listing in New York; nor did it have any agents or representatives stationed in New York.

7. The Orvis Dissent characterized Orvis’s presence in New York as:

a. “de minimis, fleeting dashes;” and

b. “minimal forays.”



000160.01316 Business 10465842v4

XI. New York “Vendor” Status A. Anyone who makes sales of tangible personal property or taxable services in New

York and who has a sufficient physical presence is required to register as a Vendor with New York.

B. “Vendor,” as defined by Tax Law § 1101(b)(8), broadly includes:

1. Making Taxable Sales: A person making sales of tangible personal property or taxable services. Tax Law § 1101(b)(8)(i)(A).

2. Maintaining A Place Of Business: A person maintaining a place of business in the state and making sales (whether or not from that place of business) to persons within New York of tangible personal property or taxable services the use of which are taxable. Tax Law § 1101(b)(8)(i)(B).

3. Soliciting Business Leading To Sales: A person who solicits business either:

a. By In-State Actors: by employees, independent contractors, agents or representatives and by reason of such solicitation makes sales to persons within New York of tangible personal property or taxable services, the use of which are taxable; or

b. By Advertising + Additional Connection: by distribution of catalogues or other advertising material (whether or not regular and systematic) IF such person has some additional connection within New York, and by reason of such solicitation makes sales to persons within New York of tangible personal property or taxable services, the use of which is taxable; Tax Law § 1101(b)(8)(i)(C).

4. Deliveries By Other Than Common Carrier: A person who makes sales of tangible personal property or services, the use of which is taxable, and who regularly and systematically delivers such property or services in New York by means other than U.S. mail or common carrier. Tax Law § 1101(b)(8)(i)(D).

5. Regular and Systematic Advertising Plus Nexus: A person who regularly or systematically solicits business in this state by distribution (regardless of from where) of catalogs, advertising flyers or other means of solicitation of business, to persons within New York and by reason thereof makes sales to persons within New York of tangible personal property, the use of which is taxable, if such solicitation otherwise satisfies nexus. Tax Law § 1101(b)(8)(i)(E).

6. Etc., Etc. There are many other activities or forms of conduct that may trigger “vendor” status.



000160.01316 Business 10465842v4

C. Consequences of Being A “Vendor”

1. If you are a “Vendor,” then you are a “Person Required to Collect Tax” under Tax Law § 1131(1).

2. “Persons Required to Collect Tax” include:

a. Every person who makes sales of tangible personal property as a vendor;

b. Every person who makes sales of taxable services;

c. Every person who is the recipient of admission charges (including roof gardens and cabarets);

d. Every person who is the recipient of dues from members of a social or athletic club, organization or association;

e. Every person who is the operator of a hotel;

3. If you are a Persons Required to Collect Tax/Vendor, then:

a. Obligation to Collect: Every person required to collect tax shall collect the tax from customers when collecting sale price. Tax Law § 1132(a)(1).

b. Obligation to Separately State Tax: If the customer is given any sales slip or receipt, the tax shall be stated, charged and shown separately. Tax Law § 1132(a)(1).

c. Personal Liability For Tax: Every person required to collect tax shall be personally liable for the tax imposed, collected or required to be collected. Tax Law § 1133(a).

d. Obligation to Register: Every person required to collect tax shall file a Certificate of Registration with the Department in order to obtain a Certificate of Authority to collect tax. Tax Law § 1134(a).

e. Obligation To Maintain Records: Every person required to collect tax shall keep records of every sale and of all amounts paid, charged or due and of the tax due thereon. Tax Law § 1135(a)(1).

==> All sales are presumed taxable, and the burden to establish otherwise is on the vendor. Vendors must maintain records adequate to determine the taxable status of each sale, the sale price, and the tax due and collected. 20 N.Y.C.R.R. § 533.2.



000160.01316 Business 10465842v4

==> All records shall be preserved for a period of three years from the due date of the return to which they relate, or the date of filing, whichever is later, and longer than three years if their contents are material to any open period. 20 N.Y.C.R.R. § 533.2(a)(3).

f. Obligation To File Returns: Every person required to register with the Department shall file tax returns, either monthly or quarterly as applicable. Tax Law § 1136(a).

g. Obligation To Pay Tax: Every person required to file a return shall, at the time of filing such return, pay the tax. Tax Law § 1137.

==> The amount of sales tax payable is due and payable whether or not it has been collected by the vendor from customers. 20 N.Y.C.R.R. § 533.4(a)(1).

h. Estimated Tax Payments: If applicable, taxpayers may have to file estimated tax returns and make estimated payments. Tax Law § 1137-A.

i. Obligation to Display Certificate of Authority: A certificate of authority must be prominently displayed at each place of business of the registrant. 20 N.Y.C.R.R. § 533.1(d).

XII. AMAZON” UPDATE – REMOTE SELLER NEXUS A. “Amazon” Legislation / Click Through Nexus: What is it?

1. Tax Law § 1101(b)(8)(vi).

2. With respect to sales/use tax nexus, New York has sought to apply/expand Quill’s physical presence standard when an out-of-state vendor has sufficient contacts with an in-state affiliate.

3. Under the sales/use tax, the definition of a “vendor” includes a person who solicits business by employees, independent contractors, agents or other representatives.

4. Under the “Amazon” law, a person is “presumed” to be soliciting business through an independent contractor or other representative if the nonresident seller:

a. Enters into an agreement with a resident;

b. Whereby the resident, for a commission or other consideration;



000160.01316 Business 10465842v4

c. Directly or indirectly, refers potential customers;

d. Whether by internet link or otherwise to the nonresident seller;

e. If the cumulative gross receipts from sales in New York by the seller to all such referred customers (not per referral agreement but in the aggregate) exceeds $10,000 during the preceding four quarterly periods (ending on the last day of February, May, August and November).

5. Rebuttable Presumption: The presumption may be rebutted by proof that an agent under such agreement did not engage in any solicitation in New York on behalf of the seller that would otherwise satisfy nexus.

B. Aimed predominantly at out-of-state internet retailers, the “Amazon” law requires certain “remote” retailers to begin collecting sales and use tax on sales to New Yorkers that formerly would have been exempt based on the seller’s lack of nexus with the State.

C. Example: If a New York author maintains a website to promote her own book, and on that website she provides a link to an internet bookseller where the book may be purchased, that link could subject the internet bookseller to New York sales tax liability IF the author gets a commission for sales made using the link.

D. Amazon.com New York Litigation

1. Amazon.com, LLC and Overstock.com, Inc., filed complaints with the New York Supreme Court challenging the “commission-agreement provision” both facially and as-applied asserting that it violated the Commerce Clause, federal and state Due Process Clauses, and Equal Protection grounds.

2. In a declaratory judgment action, the complaints were dismissed in their entirety for failure to state a cause of action. On appeal, the court affirmed the dismissal of the facial and Equal Protection Clause challenges, but remanded the case for further information to address the as-applied Commerce Clause and Due Process challenges.

3. Amazon.com LLC v. New York State Dep’t of Tax, 877 N.Y.S.2d 842 (N.Y. Sup. Ct. 01/12/2009), as modified by, Amazon.com LLC v. New York State Dep’t of Tax, 913 N.Y.S.2d 129 (N.Y. Sup. Ct., App. Div., 1st Dep’t 11/04/2010).

4. Appeal is pending.

E. Other States Are Introducing Their Own “Amazon” Legislation



000160.01316 Business 10465842v4

XIII. Nexus – A Real Life Example: Advisory Opinion No. TSB-A-12(1)S (02/09/2012)

A. Advisory Opinions

1. Informal Guidance issued by Tax Department upon formal request of a taxpayer

2. “Similar” to a Private Letter Ruling issued by the Internal Revenue Service

3. Binding precedent upon the parties, but not as to others

B. Payment Processing Service -- TSB-A-12(1)S (02/09/2012)

1. California-based company launched in September 2010

2. Provides an innovative, new payment processing service

3. Serves under-banked or non-banked community, enabling remote sales with a local cash payment.

4. Buy online, but pay at Convenience Store (e.g., 7-Elevan)

5. Company had no employees, offices, property located in New York

C. Is Payment Processing Service Subject to Sales and Use Tax?

1. No. The Tax Law imposes tax on the retail sale or use of tangible personal property, including prewritten software, and certain enumerated services, including information services (Tax Law § 1105[a], [c]).

2. The service, as described, is not among the enumerated services subject to tax. Accordingly, assuming the provision of the service is Petitioner’s only activity in the State, Petitioner does not have to register as a person required to collect sales and use tax (Tax Law § 1134).

D. Do Merchants Qualify As Vendors As a Result of Using Payment Processing Service to Receive Payments from their Customers?

1. No. To be required to collect sales and use tax, a seller must qualify as a vendor, which is defined in Tax Law § 1101(b)(8).

2. Tax Law § 1101(b)(8)(v) excludes from the definition of a vendor “a person who is not otherwise a vendor who purchases fulfillment services carried on in New York by a person other than an affiliated person.”



000160.01316 Business 10465842v4

3. Tax Law § 1101(b)(18) defines “fulfillment service” to include “billing and collection activities.”

4. Convenience Store’s acceptance of payment from persons using Service X to make payments to Merchant is a collection activity. Accordingly, Convenience Store’s acceptance of payment would not qualify Petitioner or Merchant as vendors for purposes of sales tax.

E. Does Use of Service X to Accept Payment from Customers Constitute Doing Business for Purposes of Article 9-A Corporation Tax?

1. No. Section 209.2(f) of the Tax Law provides that a foreign corporation shall not be deemed to be doing business, employing capital, owning or leasing property, or maintaining an office in New York State, for purposes of Article 9-A of the Tax Law, by reason of “the use of fulfillment services of a person other than an affiliated person.”

2. “Fulfillment services” has the same definition for Article 9-A corporation tax purposes as it does for sales tax purposes, including “billing and collection activities” (see Tax Law § 208.19).

3. Accordingly, assuming that Petitioner, Merchant and Convenience Store are not “affiliated persons,” Merchant's use of the service to accept payment from its customers does not constitute doing business in New York for purposes of Article 9-A of the Tax Law.

***

Thank you.

***

**** This outline was prepared by Hodgson Russ, LLP For Informational Purposes Only. It does not reflect the opinions of either Mr. Connolly or the Department of Taxation and Finance. ****

Read about IRS cases on my website www.arpearlmanlaw.com p. 1

Allan R. Pearlman, Esq.’s

Inside this issue Sheen & Lohan: Hollywood Nut to Hollywood Nut — Here’s $100K, Now, Pay Your Taxes! … p. 1

Bookkeeper’s Bogus Statement of Income Becomes a Brick in the Prison Wall… p.2

Dentist: False Teeth v. False Tax Return … p. 2

Fake W-2 Scheme Fuels Phony Refund Claims … p.3

“Don’t Tell, Don’t Tell”: Businessman Tax Guilty of avoiding tax by not telling his tax preparer about in-come… p. 3

Letter from the Editor (Post-Mayan Apocalypse Fiz-zle): A New Life for this Newsletter … p. 4

Hollywood Nut to Hollywood Nut: Here’s $100K — Pay Your Taxes!

In a moment of apparent clarity and largesse, actor Charlie Sheen, a recent star of the television hit com-edy, Two and a Half Men, and now starring in Anger Management, gave controversial actress Lindsay Lohan $100,000 to help pay down her blockbuster-sized tax debt.

Sheen and Lohan worked together recently, filming Scary

Movie 5. According to TMZ, which first reported this story, Lohan used Sheen’s money for its intended purpose: paying Uncle Sam’s mean-er cousin, the IRS.

Lohan, whose off-screen personal dramas have sometimes out shown her considerable

talent as an actress, allegedly owed the IRS $233,904 in back taxes for 2009 and 2010, TMZ reported.

With Sheen’s gift, Lohan has substantially reduced the tax debt TMZ says she has (what a big bite she got to take out of that balance due!), though interest and penalty continue to accrue on that part which is still unpaid and past due.

Solveyourtaxproblemnow.com / arpearlmanlaw.com / lifelawandtaxes.com

January 2013 Another year, another tax return


Stick-to-False-Teeth Dept:

Florida Dentist’s False Statement on Tax Return = Tax Fraud; Maybe Prison

A Florida dentist faces up to three years in prison

after pleading guilty to making a false statement on a federal income tax return.

According to the plea agreement, Edward James Weiss, 63, of Rockledge, Fla., diverted income from his dental business bank account over a period of three years.

Instead of depositing the income into his business account, he would often deposit the checks into his personal bank account. Weiss failed to inform his tax return preparer that he received and deposited the money into his personal bank account.

As a result, Weiss omitted income from his tax returns for the years 2005, 2006 and 2007. In all, he avoided paying $264,581.

Bookkeeper’s Bogus Statement on Masonry Cli-ent’s Income Becomes a Brick in the Prison Wall

A Connecticut bookkeeper was sentenced to four months in prison and supervised release after filing false income tax returns.

According to court records, Renee Lamar Joseph, 38, of Norwalk, Conn., was the bookkeeper for Jo-seph Landscap-ing and Masonry, a landscaping and masonry business owned and operated by her husband. Joseph’s responsibilities included handling JLM’s billing and account-ing and providing tax-related infor-mation to tax return preparers.

On Aug. 16, 2012, Joseph admit-ted that in April 2004, she signed and filed a false joint 2003 tax return that falsely represented JLM’s Schedule C business receipts as $221,621 when, in fact, the business receipts for calendar year 2003 were approxi-mately $315,949. Instead of provid-ing her tax preparers with bank state-ments or information from the busi-ness’ accounting software, Joseph provided summaries, which she cre-ated and adjusted, that substantially understated business income.

As part of her sentence, Joseph is required to make restitution in the amount of $88,095, plus penalties and interest, for the tax years 2002

Thank You! Thank You!

Thanks to YOU, the word is spreading. Thanks to my clients and friends who have graciously re-ferred me to their friends, clients and relatives! It’s an honor to build my business based on positive comments and referrals from people just like you.

I could not do it without you! ☺

Get a copy of our FREE Special Report,

“7 Big Mistakes Taxpayers Make and How to Avoid Them.”

Get it now by going to http://bit.ly/TZEHt8

(or www.arpearlmanlaw.com/AvoidTaxMistakes)


LAW OFFICE OF ALLAN R. PEARLMAN

116 West 23rd Street, Suite 500

New York, NY 10011

Organization

Phone: 646.827.4257

Fax: 646.837.0882

E‐mail: [email protected]

I’d Like To Hear From YOU!

Whether you’d like to avoid the IRS, contact the IRS, settle with the IRS or help out a friend, relative or cli-ent, I’d love to hear from you. I would be happy to pro-vide you or that special person you refer a no-obligation confidential consultation to explain every option available to solve IRS problems. ◦Attorney Advertising—Past Results Do Not Guarantee a Similar Outcome◦

“DON’T TELL, DON’T TELL”: BUSINESSMAN TAX GUILTY

Roland Violette Jr., 46, of Ellington, Conn., was sen-tenced to four months in prison for failing to pay more than $96,528 in federal income taxes in the 2003 and 2004 tax years. According to court records, Violette withheld from his tax preparer substantial amounts of business re-ceipts for his two businesses, Ellington Oil Company and Violette Mechanical.

A St. Louis, Mo., woman faces up to three years in prison after pleading guilty to filing a false federal income tax return.

According to court records, Sharitte Green, 27, admitted to participating in a scheme that prepared and provided false Forms W-2 to friends and relatives for the purpose of enabling them to file false federal income tax returns and receive false federal tax re-funds. Seven others were charged with federal offens-es for their roles in the scam.

The W-2 forms were falsified in representing that the individuals were employees of Masters Touch Cleaning Services Inc., a Missouri corporation. The W-2 forms also falsely represented wages paid, false-ly represented federal income taxes withheld, falsely represented Social Security taxes withheld, and false-ly represented Medicare taxes withheld.

The indictment was the result of an investigation by the Internal Revenue Service Criminal Investiga-tions .

the sun, the moon, and the stars? (Bad idea: those tele-vision snake oil salesmen have been getting investigat-ed and run out of business for deceptive practices.) Here on earth, when the IRS calls you, you want an attorney who deals with facts and rules, a/k/a “reality.”

Fourth, with the much-discussed Mayan Calendar Apocalypse a total bust, the world has not ended. So, carry on we must. This includes preparing and filing tax returns, paying taxes, and dealing with an ever-changing landscape of new rules and policies. (As a bonus, if we make it to next summer, we get to see the next installment of the television series “Breaking Bad,” where even some meth dealers pay their taxes.)

Whether the current wrangling over federal budget policy will result in our “going over the fiscal cliff” come January 1st or not, the tax rules they are a-changin’. My newsletter, Life, Law and Taxes may of-fer unique angles on tax rules and policy.

The plan is to publish monthly, though we may occasionally double up. Issue by issue, the further plan is to bring interesting and useful tax, legal, and other items of curiosity and more to you, Dear Reader.

(Continued from page 4) (Reviving Dormant Newsletter)

Taxes: Of life's two certainties, the only one for which you can get an automatic extension.

– Author Unknown

Fake W-2 Scheme Fuels Phony Refund Claims, but then, Prison too (“Oops,” Schemer might’ve said)


Allan R. Pearlman, Esq. 116 West 23rd St., Suite 500 New York, NY 10011

“There's only one kind of tax that would please everybody – one that nobody but the other guy has to pay.”

– Earl Wilson

It has been a while since the last edition of Life, Law and Taxes, was completed and mailed out to you.

Ceasing publication was not exact-ly planned. Instead, regular, monthly publication fell victim to what’s some-times known as “death by 1,000 cuts” (and even a few clients – Thank You!). Even a four-page newsletter requires time, effort, and attention to “git ‘er done” and into the mail, so that you (“Dear Reader”) can get updated on the foibles and frailties of taxpayers tangling with the government agency people love to hate, or fear, or both, the IRS.

Even though publication of Life, Law and Taxes took a hiatus, there were good reasons to publish it then,

good reasons to continue publishing it, and especially good reasons to revive it now while next year’s tax rules are anyone’s guess or cliff-leap of faith.

First thing, people liked it. Though only a four-page monthly newsletter mostly featuring cautionary tales about what can go wrong when taxpayers stray from the straight and narrow path, intentionally so or by circum-stance, somehow responses from read-ers show that, simply, people liked it.

So, why shouldn’t there be another thing in the world that people find in-teresting, informative, enjoyable? Something like Life, Law and Taxes? Why not?

Second, not only did readers like it, but for some it also had a salutary

influence: it actually got some people with unresolved tax issues to take a step toward dealing with and resolving them sooner rather than later.

Third, it prompted readers who did not have tax issues of their own to re-mind friends, family or colleagues who may not have been so fortunate that this is the sort of problem needing professional help and representation promptly. The phrase “Lawyer up” applies here. So does “Don’t go it alone.”

When the IRS comes knocking, who are you going to call? Ghostbust-ers? Those guys moved on long ago. Or, those charlatans who advertise on TV promising beleaguered taxpayers

(Continued on page 3)

Letter from the Editor (Post-Mayan Apocalypse Fizzle): A New Life for this Newsletter

You can receive this monthly newsletter in the mail for free. Two easy ways to get on the list:

1) Give Allan Pearlman your business card and write “Newsletter subscribe” on the card at this NYCLA event,

OR

2) send an email to [email protected] and include your name, mailing address, and put in the subject line “subscribe to newsletter”

B the gap SeSSion a Legal Research.NYS Tax...Timothy P. Noonan, Hodgson Russ LLP; Lance E....

Documents

Transcript of B the gap SeSSion a Legal Research.NYS Tax...Timothy P. Noonan, Hodgson Russ LLP; Lance E....