Massachusetts has joined the growing number of states that have implemented a sales tax collection obligation for out-of-state retailers. On April 3, 2017, the Massachusetts Department of Revenue issued a directive announcing that the Department is adopting an “administrative bright-line rule” for sales tax collection requirements for Internet vendors (Directive 17-1). Effective July 1, 2017, an Internet vendor with a principal place of business located outside of Massachusetts is required to collect the state’s sales tax if it had in excess of $500,000 in Massachusetts sales or 100 or more transactions with Massachusetts customers in the preceding 12 months.
On its face, the Directive appears to continue the trend of requiring remote sellers to collect sales tax merely due to a certain threshold of in-state sales being met. Besides Massachusetts, the most recent state to adopt a bright-line “economic nexus” standard for sales tax collection is Wyoming, where Gov. Matt Mead signed a bill establishing a sales tax collection threshold of $100,000 of annual sales or more than 200 sales to Wyoming customers. Similar rules have been passed in Alabama, South Dakota, and Tennessee, with the South Dakota rule likely headed to the state’s highest court.
However, Massachusetts’ strategy appears to be slightly different from the others states. Legislation passed in the other states require sales tax collection by retailers with no in-state physical presence, which is clearly at odds with the nexus standard established by the U.S. Supreme Court in the 1992 case of Quill Corporation v. North Dakota. The presumed strategy of the states enacting such provisions is to have the issue taken up by the courts in light of the failed attempts by Congress to address the issue through federal legislation.
Rather than attacking Quill head on, Massachusetts is attempting to distinguish what constitutes a physical presence for a mail order retailer as opposed to an Internet retailer. The ruling in Quill addressed the sales tax collection obligation of a mail order retailer, and concluded that the court’s bright-line “physical presence” standard was not met by a retailer whose only connection with customers in a taxing state is by common carrier or the United States mail. The Massachusetts Directive reasons that the business activities of Internet retailers are factually distinguishable from the business of mail order retailers because Internet retailers do not limit their contacts with the state to mail and common carriers. The directive concludes that Internet retailers have a physical presence in Massachusetts because (1) retailer-owned software is affirmatively downloaded through the use of “native” or “mobile” apps or downloaded by a customer’s general use of the retailer’s website; and (2) retailer-owner proprietary cookies are placed on their customers’ computers and devices.
The troubling nature of the Directive is it seems to ignore that the Quill decision concluded that a sufficient physical presence was not established through mailings made into the state that were owned by the retailers. The in-state mailings did establish some existence of a physical presence for the mail order retailer, but it was not sufficient in the eyes of the Court. Any software and cookies that are downloaded by an in-state customer seemingly serve the same purpose as a mailed catalog. The analogous nature of mailed catalogs and downloaded software arguably should result in the same non-sufficient physical presence as concluded in Quill. Whether online retailers abide by this directive is yet to be seen. If the developments in other states are any indication, the issue of remote seller sales tax collection could very well be litigated in Massachusetts in the near future. It seems that it is only a matter of time before the U.S. Supreme Court will be forced to address the issue again.
If you have any questions regarding your sales tax collection obligations, please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200.
Winning a contract in a new state can present many challenges, not least of which is ensuring that your company is compliant with the state’s tax code. The worst approach to state tax compliance is assuming that the taxes your company may be subject to and the tax treatment of your company’s activity will be the same as in other states. This is especially the case when it comes to Hawaii. It’s not surprising that many government contractors venturing into Hawaii overlook the General Excise Tax (GET), as it’s often assumed that the GET is essentially the same as most other states’ sales and use taxes. However, the unique nature of the GET can catch many businesses off guard, and the Department of Taxation’s penalties can be quite unforgiving.
The first thing every government contractor needs to know about the Hawaii GET is that it is NOT a sales tax. Certainly, the GET has some similarities to a typical sales and use tax. However, the GET has three critical distinctions from a typical sales tax, all of which affect government contractors. Those distinctions are:
Contractors hanging their hat on the “I am a government contractor, so I am exempt from tax” stance are in for a rude awakening when they receive a notice from Hawaii requesting GET returns for the past decade. Most government contractors providing services to the government are subject to the GET at a rate of either 4.0% or 4.5% of their gross receipts, so it does not take a particularly large contract to result in a material tax liability.
At its core, the GET is rather simple. The tax base for a service provider is generally gross revenue from services performed from within Hawaii. Given that the GET is a gross receipts tax, there are very few exemptions or deductions. However, the few that government contractors should be aware of are:
Government contractors need to be proactive in recognizing that their receipts will likely be subject to the GET, so the additional costs should be factored into their bids. Contractors that are assessed years after a contract has ended will likely be unable to recoup those liabilities from their customers. Finally, the penalties assessed by Hawaii can be up to 60% of the tax liability, but there is a fair chance of getting those penalties waived, especially if you come into compliance before Hawaii issues you a notice.
If you have concerns about your company’s compliance with the Hawaii GET, please contact Aronson or Michael L. Colavito, Jr. at 301.231.6200.
On August 8, 2016, Florida reaffirmed its position on the taxation of electronically delivered software and Software as a Service (SaaS) in Florida Technical Assistance Advisement 16A-014, 8/8/2016. The issuance of the ruling means that Florida remains in the group of states still requiring software to be delivered in a tangible form for sales tax to be imposed.
The ruling addressed the sales of a provider offering subscription-based access to customized software hosted on remote servers as well as other cloud computing services such as hosting, back-up, and storage. The provider’s customers did not receive any tangible personal property as part of the subscription to the software and services offered. In addressing the treatment of these products and services, the Department of Revenue (the Department) reflected its refusal to expand the application of sales and use tax beyond the plain language of Florida’s statutes and regulations.
The Department made it clear that software can only be subject to Florida sales and use tax when transferred by some tangible means, whether by providing the software on a disk or in connection with the sale of other tangible personal property such as computer hardware. The Department further confirmed its treatment of the sale of customized software as a nontaxable service. Thus, software electronically delivered, for example software that is downloaded via a link, or accessed remotely through the cloud is not subject to sales tax in Florida. California, Maryland, and Virginia are a few states that share in Florida’s approach, only taxing pre-written software when it is delivered via a tangible medium.
Still, anyone familiar with the recent trend in this area knows that many other states approach taxing software very differently. The sales and use tax treatment of the sale of software, and even the sale of cloud computing services varies wildly. New York, Indiana, and Washington tax sales of pre-written software, even if the software is delivered electronically or accessed over the cloud. While the ultimate sales tax treatment is similar in these states, result is reached in different ways. Unlike Florida, that applies its sales tax laws as written, New York and Indiana apply a strained interpretation of old law to new technology. Both states have concluded that they can tax software accessed remotely because the end user “constructively receives” the software. Washington, on the other hand, has updated its law to address the new technology, with statutory provisions clearly making both electronically delivered software and SaaS subject to tax.
The disparate sales tax treatment of software and cloud computing services underscores the importance for software sellers and purchasers to be diligent in maintaining compliance with state tax rules. This is particularly difficult in the area of software. The states’ attempts to deal with potential revenue loss from the new software delivery methods has resulted in numerous rule changes across jurisdictions, which can be confusing for taxpayers.
If the sales tax treatment of software or cloud computing services is an issue in your business, please contact Michael L. Colavito, Jr., JD, at 301.231.6200 or Mcolavito@aronsonllc.com.
Making assumptions when it comes to sales and use tax is ill-advised for any entity’s approach to compliance. This is especially the case for not-for-profits. Exemption from federal income tax can count for nothing in the sales and use tax world, and states are anything but uniform when it comes to exemptions available for not-for-profits. Even when there are sales and use tax exemptions available for not-for-profits, it’s essential to ensure that all administrative requirements are followed in order to properly claim the exemption.
At the very least, all not-for-profits need to ask themselves three questions when it comes to sales and use tax: What states? What purchases? What sales?
No entity, not-for-profit or otherwise, will have a sales and use tax payment or collection obligation unless a state has jurisdiction over the entity. In the state tax world, this concept is known as “nexus.” For sales and use tax, an entity needs to have a physical presence in the state before a state can have jurisdiction to tax it. Many taxpayers mistakenly interpret the “physical presence” test to mean a substantial permanent presence – for example, having an office in a state. Clearly, an office location in a state would be considered a physical presence by all states, but many other in-state activities can constitute nexus. For example, a physical presence can be established by having a telecommuter in a state, having employees temporarily in a state, or having independent contractors in a state performing services for the not-for-profit.
Once a not-for-profit determines that it has nexus with a state, it must determine if any of its purchases being made in the state are subject to sales tax. Many states have sales and use tax exemptions for purchases made by not-for-profits, but these exemptions vary significantly in terms of which not-for-profits are exempt and the scope of the purchases that are exempt. For example, California only provides sales and use tax exemptions for purchases made by entities meeting its rather narrow definition of a “charitable organization.” Further, if an entity meets that definition, the only purchases that are exempt from sales and use tax are those that are made for the purpose of donation by the organization. All purchases of supplies (such as tools and office supplies) are not exempt. Under these rules, most associations and membership organizations (i.e., non-IRC 501(c)(3) entities) would be taxable on all of its purchases.
Other states, such as Maryland and Ohio, have broader exemptions on purchases made by not-for-profits, but even in these states the exemption does not apply to all entities that may be exempt from federal income tax. Further, most states require not-for-profits qualifying for a sales tax exemption to obtain an exemption certificate from the applicable taxing authority, which must be provided to vendors at the time of purchase.
Not-for-profits also need to be aware if its sales of products or services are subject to a state’s sales and use tax. If a not-for-profit’s sales are subject to sales tax, then it must register to collect and remit sales tax to the state. Merchandise sold, training materials (i.e. tangible or digital), software applications, access to a database, and subscriptions to publications are items to which not-for-profits need to pay particular attention. States often have exemptions for certain sales of admissions to events hosted by not-for-profits and sales of food and beverages items. Sales of merchandise are typically subject to sales and use tax. This is especially the case when a not-for-profit has a permanent retail store, as opposed to sales that are isolated in nature. For example, Colorado, Georgia, Illinois, and Pennsylvania generally impose their sales tax on sales made by not-for-profits unless the sales meet the applicable rule pertaining to isolated/occasional sales.
It’s important for not-for-profits to be proactive in the area of sales and use tax. When activities are expanded to new states, whether from hiring an in-state employee or frequently hosting conferences or seminars in a state, not-for-profits should immediately look into whether it will be making any purchases or sales that may result in a sales tax compliance obligation. Being reactive can result in penalties, interest, and the practical in-ability to recoup uncollected taxes.
If you have any questions about sales and use tax, please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301-231-6200.
When old tax liabilities are discovered, taxpayers can either play the audit lottery or come clean to state taxing authorities about their back taxes. Most states offer voluntary disclosure agreement (VDA) programs for non-filers, which typically offer benefits that make the latter option more attractive.
With more and more businesses offering products and services in multiple jurisdictions, even the most well-intentioned business taxpayer can run afoul of complying with state filing obligations. Taxpayers typically become non-compliant because of the varying state rules regarding when a state can impose its income or sales and use tax on out-of-state companies. Over the last decade, numerous states have expanded those rules to allow them to tax an increasing number of multi-state businesses. Thus, many taxpayers may be facing multiple years of back taxes and penalties of up to 25%.
Rather than hoping the state never finds you, coming forward voluntarily can be a smart move for many reasons:
The process of entering into a VDA and becoming compliant can be easier than you might imagine. Most states allow taxpayers to initiate the process anonymously through a representative, such as a CPA. Also, rather than preparing the back year returns, many states allow reporting to be done by spreadsheet. In exchange for voluntarily coming clean, states typically offer a waiver of penalties and a limited look-back period of three or four years. Thus, if your business’ tax exposure extends to years prior to the look-back period, those liabilities are waived. Many states also offer payment plans.
Taxpayers that discover back tax liabilities and are considering participating in a VDA program should consult their tax advisors. Although a VDA can be an excellent option for many taxpayers that discover back tax liabilities, not all taxpayers are eligible for each program, and confirming a company’s overall compliance with all tax types needs to be considered. Finally, a taxpayer needs to understand all the terms of the agreement before entering into a VDA.