Multistate Tax Symposium...• Certain states source the rental of TPP at the location of the...

The 2020 National Multistate Tax SymposiumMastering the Art (and Articulation) of State Tax—Distilling the Complex

January 29-31, 2020

Indirect tax classification challenges – digitizing the archaicNana Kay Burkhart, Lyft, Inc.Craig B. Fields, Morrison & Foerster LLPDoug Nagode, Deloitte Tax LLP

January 31, 2020

3The National Multistate Tax Symposium: January 29-31, 2020Copyright © 2020 Deloitte Development LLC. All rights reserved.

• Evolution from Products to Service Economy

− SaaS, PaaS, IaaS

− Streaming Services

• The “Internet of Things”

• Sales/Use tax history

• Taxability Considerations

• Sourcing Considerations

• Leading Practices

Agenda

4

Evolution from Products to Service Economy


• Software-as-a-Service (“SaaS”)

− A software licensing and delivery model in which a third-party provider hosts applications and makes them available to customers over the Internet. Often, the software is licensed on a subscription basis and is centrally hosted.

◦ Allows a customer to access a provider’s applications on a cloud infrastructure.

• Platform-as-a-Service (“PaaS”)

− A category of cloud computing services that provides a platform allowing customers to develop, run, and manage applications without the complexity of building and maintaining the infrastructure typically associated with developing and launching an app. It is a complete development and deployment environment in the cloud.

◦ Allows a customer to deploy its created or acquired applications on a cloud infrastructure using programming languages, libraries, services or tools supported by the provider.

• Infrastructure-as-a-Service (“IaaS”)

− Online services that provide high-level Application Programming Interfaces (APIs) used to dereference various low-level details of underlying network infrastructure like physical computing resources, location, data partitioning, scaling, security, backup, etc.

◦ This model allows a customer access to processing, storage, networks, and other computing resources, where the customer can deploy and run software, including operating systems and applications.

Cloud Computing – SaaS, PaaS, IaaS



Streaming Services

• Streaming involves the transmitting of digital audio and/or video content while users listen and/or watch. Unlike downloading files, streaming content doesn’t require the end-user to obtain the entire file for the content before watching/listening to it.

• A streaming service is generally an online provider of entertainment (music, movies, etc.) that delivers the content via an Internet connection to the subscriber's computer, TV or mobile device.

Streaming Services


7

The Internet of Things – What’s Next


Making sense of the buzzwords: What is the Internet of Things?


Internet of Things (“IoT”) refers to a world of intelligent, connected devices that

generate data for automating business processes and enabling new services

PEOPLE ANALYTICS

Physical devices

and objects

intelligently

connected

Delivery of the

right information to

the right place at

the right time

Connection of

people in more

relevant and

valuable ways

Internet of

Things

THINGS PROCESS

Individual data

streams

are processed and

analyzed with

algorithms


Which Industries does it impact…


Internet of Things (IoT) refers to a world of intelligent, connected devices that

generate data for automating business processes and enabling new services

MANUFACTURING ENERGY & RESOURCES

RETAIL / CONSUMER PRODUCTS

LIFE SCIENCES / HEALTHCARE

• Predictive Maintenance

• Supply Chain Enhancement

• Asset Tracking• Automate Workflows• Personnel Safety

• Smart Grid• Leakage Prevention• Wellhead

Enhancement• Asset Enhancement• Personnel Safety

• Consumer Marketing• Reimagined Store Front• Intelligent

Replenishment• Supply Chain

Management• Memorable Experiences

• Clinical Trials• Patient Experience• Equipment Tracking &

Diagnostics• Remote Monitoring• Inventory Management• Supply Chain Management

AUTO / TRANSPORTATION

MILITARY FINANCIAL SERVICES

SMART CITIES

• Dealership of the future

• Remote diagnostics• Fleet management• Autonomous vehicle

• Connected battlefield• Supply chain• Fleet Tracking

• Perf-based Insurance• Personalized risk

profiles• Retail banking

• Smart lighting• Transportation / Energy

Management• Smart parking• Smart waste


Consumers are benefitting from IoT right now


Internet of Things (IoT) refers to a world of intelligent, connected devices that

generatpode data for automating business processes and enabling new

services

SPEED & CONVENIENCE

Optimized shopping experiences

Convenience of payment

Ease of identifying productand location

PERSONALIZATION

Tailored shopping experiences

Meaningful recommendations

UNIQUE EXPERIENCE

Improved customer satisfaction

Experience aligned withcustomer passions

IoT potentially may make life easier and more convenient

11

Sales and Use Tax History


• ~45 States and D.C. impose sales and use tax (“SUT”) on sales of tangible personal property (“TPP”) unless specifically exempt, but many states only tax specifically enumerated services.

• Historically, very few states enacted broad-based SUT applicable to most services.

• Recently, there have been numerous (yet generally unsuccessful) attempts by states to broaden the tax base to include more services.

• States are starting to issue guidance on whether mere access to computer hardware and access-only software are subject to SUT.

• Although few states tax computer and data processing services, per se, some jurisdictions are attempting to classify access-only and/or hosting services as leases of TPP.

Classification – What is a Service / Software?



Jurisdictions could characterize into any of the following taxable categories:

• Enumerated service ("cloud" or Application Service Providers)

• Sale, rental, or access to prewritten software

• Data processing

• Data storage service

• “Digital automated service”

• Computer service, computer exchange service

• “Canned” information service, "personalized" information service

• Communications service

• Digital equivalent to traditional tangible personal property ‘aka’ digital goods

Classification – What is being sold?


Not only important to define what it is not, but must also be able to identify what it is!!!

14

Taxability Considerations


• Trend – states imposing tax on streaming services

◦ Pennsylvania – expanded definition of taxable TPP to include access by streaming

− Methods may vary depending on the type of transaction

◦ City of Chicago – Admin. Ruling applying amusement tax on streaming services. Constitutional? What about federal Internet Tax Freedom Act?

◦ D.C. – expanded definition of retail sale to include digital goods in 2019

− Includes “any other otherwise taxable tangible personal property electronically or digitally delivered, whether electronically or digitally delivered, streamed, or accessed and whether purchased singly, by subscription, or in any other manner, including maintenance, updates, and support.”

◦ Iowa – expanded tax to include specified digital products in 2019

• Not Universal

◦ Indiana – SaaS not taxable after June 30, 2018

◦ Virginia – proposal to impose tax on streaming services defeated in House

◦ South Carolina – proposal to exempt streaming services from tax

Streaming Services



• Alabama – Proposed Amendments to Rule 810-6-5-.09

◦ Alabama proposed a rule change that would’ve expanded it’s interpretation of the state’s “rental tax” on the leasing and rental of TPP.

− The Proposed rule change expanded the definition of TPP to include digital transmissions, such as ‘on demand’ movies, television programs, streaming video, streaming audio, and other similar programs that are made available to customers, regardless of the method of transmission, whether rented by a subscription for a definite or indefinite period.

◦ The proposed rule change was hit by large opposition from several taxpayers and other interested parties.

− Commentary suggested that the proposed amended rule greatly exceeded the Department’s rulemaking authority, and the Alabama Legislature would be best suited to effectuate such a drastic change.

Streaming Services



• Rhode Island – Advisory issued as a reminder that as of October 1, 2018, SaaS will be subject to sales and use tax.

− Broadly applies to everything from cloud based spreadsheets to online dating and job-search programs

• Iowa – passed a law making SaaS subject to sales and use tax starting January 1, 2019.

− Also included an exemption for SaaS provided to a commercial enterprise for use exclusively by the commercial enterprise.

SaaS


18

Sourcing Considerations


• Certain states source the rental of TPP at the location of the property (or the location where the property is first used).

• This standard is difficult to apply in a cloud computing situation, because oftentimes the locations of servers and/or users of the software are either indeterminable or unknown.

• Some states tax electronically transmitted computer software, ASP and hosting services as the rentals of TPP.

What’s the standard?



From a seller’s perspective, the concepts of destination and benefit received may be difficult to apply to digital items

• Seller may have no idea where the receipt of the items takes place or where the items are used

From a purchaser’s perspective, location of use may not always be known.

• Is “use” at the server location or user location?

• States vary

• Trend toward user location

− Be aware of states that include software or digital products in their definition of TPP—they may take a more traditional view of where these items should be sourced.

Digitals goods used concurrently in multiple jurisdictions (“MPU Transactions”)

• Should tax be paid to the state where the purchase is initially made?

• The state (or states) where the software is eventually used?

Depends on the state



What states are doing about MPU transactions:

• Many states not only permit allocation or apportionment of the sale/use tax base, but require it.

• State statutes and regulations often do not provide a specific answer/approach, but instead provide for a “range” of acceptable answers

• Auditors may look for a sensible approach that assigns sales to locations where the service is being “received”

Practice Tips

• When allocating or apportioning the sales/use tax base, develop a sensible and uniform approach.

• Uniform does not mean that all transactions are equal, but rather that a particular type of transaction should be allocated in the same manner to each state (unless a particular state has a different sourcing regime).

Multiple Points of Use (“MPU”) Transactions



Washington [Wash. Admin. Code 458-20-15502(11)]

• A business claiming an MPU exemption must report and pay use tax on that portion of the digital code, prewritten software, or remote access software used in Washington.

• The taxable amount is determined by the number of users in Washington compared to users everywhere.

• Generally, digital products and remote access software are used in Washington when the buyer first accesses, downloads, possesses, opens, stores, enjoys, or receives the benefit of the service in Washington.

Minnesota [Miss. Stat. § 297A.668, Subd. 6a]

• Business purchaser that has not received a direct pay permit may use an exemption certificate indicating multiple points of use if:

− Purchaser knows at the time of its purchase of a digital good, computer software delivered electronically, or a service that the good or service will be concurrently available for use in more than one taxing jurisdiction

− Purchaser delivers to the seller the exemption certificate at the time of purchase

Multiple Points of Use Transactions



Colorado [Colo. Rev. Stat. § 39-26-102(15)(c)(IV)]

• Software sourced based on multiple points of use

• Purchaser must provide written statement to retailer attesting to license fees associated with points in and out of Colorado

• Written statement relieves retailer of liability associated with the proration

Massachusetts [Mass. TIR 13-10, 7/25/2013]

• Computer/Software services sourced based on multiple points of use

Texas [Tex. Admin. Code 3.330(f)(3)]

• A multi-state customer purchasing data processing services for the benefit of both in-state and out-of-state locations is responsible for issuing to the data processing service provider an exemption certificate asserting a multi-state benefit, and for reporting and paying the tax on that portion of the data processing charge which will benefit the Texas location.

• A data processing service provider that accepts such a certificate in good faith is relieved of responsibility for collecting and remitting tax on transactions to which the certificate relates




• Can you provide documentation post sale?

• Massachusetts multiple points of use sourcing update

− Must a purchaser provide a MPU exemption certificate at the time of purchase or prior to the date the vendor remits sales tax on the purchase?



25

Leading Practices


• Embed the in-house Tax Department in the Procurement process to facilitate sales tax planning

• Leverage initiatives of Industry groups/trade associations

• Consider how characterization for indirect taxes may conflict with the characterization for GAAP, information reporting (i.e., 1099’s), etc.

• Strategically provide feedback to taxing authorities, as appropriate

• Ask for help!

• Request a Private Letter Ruling

Leading Practices


Contact information

P. Doug Nagode

Deloitte Tax LLP

[email protected]

Nana K. Burkhart, Esq.

Lyft, Inc.

[email protected]

Craig B. Fields

Morrison & Foerster LLP

[email protected]

mailto:[email protected]




This presentation and related panel discussions contain general information only and the respective speakers and their firms are not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. The respective speakers and their firms shall not be responsible for any loss sustained by any person who relies on this presentation.

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