Recently, I presented at a webinar hosted by Strafford Publishing on the subject of sales and use tax on digital products and services. It almost goes without saying that the interstate sale of digital products—whether books or software—is complicated, if for no other reason than it requires analyzing the sales and use tax consequences of such transactions based upon forty-five states’ (and the District of Columbia’s) sales tax laws, which were adopted long before the advent of the digital age. For example, the starting point for sales tax analysis in most states is whether the transaction involves the sale of “tangible personal property.” Is a digital product such as a digital book that is downloaded by the customer tangible personal property?
The states do not provide for uniform treatment of the taxability of digital products from state to state, nor are all digital products taxed similarly within a given state. Colorado, for example, taxes digital books and music, but does not tax digital software. Twenty-five states tax digital books, music and videos, while thirty states tax prewritten software.
What makes analysis in this field even trickier are the different methods of delivery of digital products and the various pricing plans under which such products are sold. For example, under one delivery method, the seller provides the buyer an electronic access code to permit the buyer to download the digital product at the buyer’s convenience. For a sale such as this, in addition to analyzing whether the underlying product is taxable, the seller must also determine whether the sale of the access code is taxable at the time of such sale. The SSUTA, of which there are 24 member states, treats the sale of a “digital code” that entitles the purchaser to download a taxable digital product as a taxable transaction. See Section 332(G). But not every state, of course, is a member of the SSUTA and non-member states do not always follow this principle. For instance, the non-member states of Texas, New York, and Illinois treat the sale of such access codes as tantamount to selling a gift card. These states treat the sale of a gift card or access code as the sale of an intangible. It is only when the gift card is redeemed that a taxable sale of tangible personal property has occurred. See, for example, Ill. General Information Letter ST 10-0052-GIL (June 4, 2010).
The law is even cloudier if the seller sells for one price a “bundle” of rights to access not only a taxable product but also a non-taxable product. For example, in Tennessee Department of Revenue, Revenue Ruling No. 12-11 (July 24, 2012), the Department of Revenue considered whether a bundled service that provided access to both reference books and computer simulation programs at a single price was taxable. The Department noted that access to digital books is taxable, while access to the software is not taxable. Nevertheless, because the provider charged one price for these products, the Department held that the entire “bundled” product was taxable. This ruling falls in line with New York’s so-called “Cheeseboard Rule,” in which tax was due on the entire purchase price where a seller was selling for one price tax exempt cheeses together with a taxable cheese board. See 20 NYCRR 527.1(b).
The conclusions that can be drawn are that a retailer of digital products should determine the taxability of the products it sells based on the nature of the products sold and the method of access or delivery of the products. In addition, a seller should consider whether to sell its products for a “bundled price,” or to price its products separately, when selling distinctly taxable or nontaxable items such as software and other digital products. If one price is charged, the seller is likely liable for tax on the entire price.
Showing posts with label SSUTA. Show all posts
Showing posts with label SSUTA. Show all posts
Friday, February 15, 2013
Friday, November 2, 2012
Tennessee Ruling Provides Another Wrinkle for Cloud Computing Services
A recent ruling by the Tennessee Department of Revenue (Ruling #12-11) illustrates some of the anomalies and pitfalls in properly taxing cloud computing services. The request for ruling concerned a service that provided Tennessee users access to software maintained on remote servers located outside of Tennessee. This is otherwise known as an SaaS service. In addition, the charge for the service permitted users access to certain databases, including certain reference materials such as dictionaries and encyclopedias. It would appear that the users did not download the references to their computers.
One of the anomalies in the ruling is that the Department stated that the SaaS portion of the service was not taxable, but access to the databases was taxable because the Department deemed the access to include the right to license and use digital books. As of January 1, 2009, the right to license and use digital books is taxable pursuant to an amendment to the Tennessee sales and use tax statute adopting the Streamlined Sales and Use Tax Agreement (“SSUTA”).
The Department’s basis for this distinction in taxability appears to be that access to software is not taxable because “title, possession, and control” of the software always resides outside of Tennessee. On the other hand, the taxability of digital books is predicated on the following underscored clause from Tenn. Code Ann § 67-6-233(a), which provides for the taxation of digital books when there has been the “retail sale, lease, licensing, or use of specified digital products transferred to or accessed by subscribers or consumers in this state.” (emphasis added). Section 67-6-231(a), providing for the taxation of software, includes only “software transferred by tangible storage media or delivered electronically,” but does not include access to the software. The difference between the two statutory provisions is subtle. On the one hand, digital books are taxable if the consumer in Tennessee has “access” to the books, without being required to download them. On the other hand, computer software is not taxable, even if the consumer has access to the software, so long as the consumer does not download the software to his or her computer in Tennessee.
Another anomaly pointed out in the ruling is the distinction between information services and digital books. The Department conceded in its ruling that data processing and information services are not taxable in Tennessee, and defined such nontaxable services as allowing “data to be generated, acquired, stored, processed or retrieved or delivered by electronic transmission.” Because the service at issue in the ruling included access not only to information maintained in a database by the service provider, but also access to reference materials such as a dictionary or encyclopedia, the non-taxable information service was transformed into access to digital books.
Finally, the “pitfall” is, as the Department ruled, because the charge was for the combined service of access to the software as well as access to the databases and the digital books, the entire transaction was taxable. This was the case even though the transaction fit within the definition of a “bundled” transaction (i.e., the sale of two or more services for one price), and some of the services were not taxable. The ruling is in line with the old New York “cheeseboard” rule* and the proverbial expression that “one rotten apple spoils the bunch.” The lesson for a cloud service provider is that it should itemize charges for separate services; otherwise it stands the risk of taxation of the entire transaction. This is so, even in the SSUTA states, which only provide for “unbundling” services (i.e., permitting the showing of the portion of a bundled transaction that is not taxable) where the services consist of a bundled transaction of “telecommunications services, ancillary services, Internet access services, or audio or video programming services.” Most cloud computer service providers do not provide such components as part of their service offerings and so itemizing the services they actually provide is a constructive way to limit the tax hit.
* Under 20 NYCRR § 527.1(b), “Taxable and exempt items sold as a single unit. When tangible personal property, composed of taxable and exempt items is sold as a single unit, the tax shall be collected on the total price. Example: A vendor sells a package containing assorted cheeses, a cheese board and a knife for $15. He is required to collect tax on $15.”
One of the anomalies in the ruling is that the Department stated that the SaaS portion of the service was not taxable, but access to the databases was taxable because the Department deemed the access to include the right to license and use digital books. As of January 1, 2009, the right to license and use digital books is taxable pursuant to an amendment to the Tennessee sales and use tax statute adopting the Streamlined Sales and Use Tax Agreement (“SSUTA”).
The Department’s basis for this distinction in taxability appears to be that access to software is not taxable because “title, possession, and control” of the software always resides outside of Tennessee. On the other hand, the taxability of digital books is predicated on the following underscored clause from Tenn. Code Ann § 67-6-233(a), which provides for the taxation of digital books when there has been the “retail sale, lease, licensing, or use of specified digital products transferred to or accessed by subscribers or consumers in this state.” (emphasis added). Section 67-6-231(a), providing for the taxation of software, includes only “software transferred by tangible storage media or delivered electronically,” but does not include access to the software. The difference between the two statutory provisions is subtle. On the one hand, digital books are taxable if the consumer in Tennessee has “access” to the books, without being required to download them. On the other hand, computer software is not taxable, even if the consumer has access to the software, so long as the consumer does not download the software to his or her computer in Tennessee.
Another anomaly pointed out in the ruling is the distinction between information services and digital books. The Department conceded in its ruling that data processing and information services are not taxable in Tennessee, and defined such nontaxable services as allowing “data to be generated, acquired, stored, processed or retrieved or delivered by electronic transmission.” Because the service at issue in the ruling included access not only to information maintained in a database by the service provider, but also access to reference materials such as a dictionary or encyclopedia, the non-taxable information service was transformed into access to digital books.
Finally, the “pitfall” is, as the Department ruled, because the charge was for the combined service of access to the software as well as access to the databases and the digital books, the entire transaction was taxable. This was the case even though the transaction fit within the definition of a “bundled” transaction (i.e., the sale of two or more services for one price), and some of the services were not taxable. The ruling is in line with the old New York “cheeseboard” rule* and the proverbial expression that “one rotten apple spoils the bunch.” The lesson for a cloud service provider is that it should itemize charges for separate services; otherwise it stands the risk of taxation of the entire transaction. This is so, even in the SSUTA states, which only provide for “unbundling” services (i.e., permitting the showing of the portion of a bundled transaction that is not taxable) where the services consist of a bundled transaction of “telecommunications services, ancillary services, Internet access services, or audio or video programming services.” Most cloud computer service providers do not provide such components as part of their service offerings and so itemizing the services they actually provide is a constructive way to limit the tax hit.
* Under 20 NYCRR § 527.1(b), “Taxable and exempt items sold as a single unit. When tangible personal property, composed of taxable and exempt items is sold as a single unit, the tax shall be collected on the total price. Example: A vendor sells a package containing assorted cheeses, a cheese board and a knife for $15. He is required to collect tax on $15.”
Friday, December 9, 2011
Storm Clouds on the Horizon for Direct Marketers Regarding Required Use Tax Collection
After the introduction in July 2011 of the “Main Street Fairness Act” by three senators from the Democratic Party, federal legislation intended to eliminate the Quill physical presence requirement for state sales and use tax collection has gathered increased support. A group of 10 Senators from both sides of the aisle introduced the “Marketplace Fairness Act” on November 9, 2011. The new bill, S.1832, is sponsored by Senators Mike Enzi (R-WY), Richard Durbin (D-IL), Lamar Alexander (R-TN), Tim Johnson (D-SD), John Boozman (R-AR), Jack Reed (D-RI), Roy Blunt (R-MO), Sheldon Whitehouse (D-RI), Robert Corker (R-TN), and Mark Pryor (D-AR). On October 13, 2011, Representatives Steve Womack (R-AR) and Jackie Speier (D-CA) introduced in the House a similar, but not identical, bill called the “Marketplace Equity Act.”
As we wrote in our post on August 8, the Main Street Fairness Act, which was sponsored by Senators Durbin, Johnson, and Reed, does not provide meaningful measures to simplify the arduous burden of sales and use tax collection. The Marketplace Fairness Act (and its House counterpart) would provide even less simplification than does the Main Street Fairness Act. It is ironic that despite the unfairness of this proposed legislation to catalogers, online retailers, and other direct marketers, the Marketplace Fairness Act is more likely to pass than prior legislative efforts, because of the increased number of sponsors from both political parties, as well as the coalition of states, industry groups, and big retailers (including e-commerce giant Amazon.com), that have announced their support for this new bill. Thus, the alarm bells should be ringing loudly for Internet and other direct marketers.
Critical Additional Feature of the Marketplace Fairness Act
The Marketplace Fairness Act would extend collection obligations well beyond the Main Street Fairness Act to authorize any state that has not adopted the Streamlined Sales and Use Tax Agreement (“SSUTA”), but has adopted negligible simplification measures, to require tax collection by remote sellers.
If adopted, the Main Street Fairness Act would permit states that become members of the SSUTA to require companies without a physical presence in the state to collect sales and use tax in the states. (There are 24 states that are members of the SSUTA). The Marketplace Fairness Act, on the other hand, incorporates this authorization and then expands it to permit any state that implements (in the language of the proposed legislation) “minimum simplification requirements” to require catalogers, online retailers, and other companies that have national annual sales greater than $500,000 to collect the state’s sales tax on sales to residents of the state.
The Marketplace Fairness Act is Anything But Fair
Although the SSUTA provides some protection to remote sellers from the burden and expenses of sales tax collection, the “simplification requirements” of this new bill provide even fewer benefits to catalog and e-marketers, and increased burdens.
There simply is nothing in this new bill that provides meaningful simplification for remote sellers. In other words, there is no provision for uniformity in sales tax laws among states; the simplification is only within the state, and the term “simplification” even within the state is a misleading term, at best.
We have discussed the SSUTA in various posts, which is incorporated, in effect, into that Act. As we have written previously, the SSUTA does not provide significant relief from administrative burdens and expenses of sales tax compliance. Just as under the SSUTA, the Marketplace Fairness Act does not ease the tax burden by requiring common exemptions throughout the states, uniform treatment for shipping and handling charges, and a consistent definition of the selling price for determining the amount subject to sales tax.
Similarly, like the SSUTA, the Marketplace Fairness Act permits the imposition of many combined (state and local) rates within a state based on the destination of the sale, thus potentially permitting a large number of different tax rates on sales to residents of the state, in addition to the thousands of tax rates a remote seller would be required to impose on its sales throughout the country. While the Marketplace Fairness Act specifies that a state must provide adequate software and services to identify the destination local rate and to hold harmless remote sellers from liability for mistakes made by a provider of sales tax administration services, this clause does not eliminate the administrative burden, expense, and risk to a remote seller of billing for, and collecting, sales and use taxes at different rates on its sales throughout the country.
Moreover, the Marketplace Fairness Act adds another layer of complexity that is not even present for the SSUTA. The SSUTA does provide for common definitions of some terms to be used in the sales tax statutes of the member states. The SSUTA also requires uniform rules among the member states for the deduction by a retailer of bad debts. The Marketplace Fairness Act does not require states to adopt such definitions and uniform rules regarding bad debts. The result is that if this new Act were adopted, a remote seller would be potentially subjected both to the definitions and bad debt rules of the SSUTA states and the differing and varying definitions and bad debt rules set forth in the statutes of the more than 20 non-member states.
There is a Real Possibility that the Marketplace Fairness Act Will be Adopted
Unlike prior state efforts to persuade Congress to enact laws eliminating the Quill physical presence test, there is increasing support from both Democrats and Republicans and from diverse industry groups for the Marketplace Fairness Act.
Over the past 20 years, the states have repeatedly caused legislation to be introduced in Congress to abolish the nexus physical presence requirement. The likelihood of successful adoption of the Marketplace Fairness Act, however, differs from prior legislative efforts for several important reasons:
The only ray of light in this gloomy picture is that Senators Wyden (D-OR) and Ayotte (R-NH) and Representatives Lungren (R-CA) and Lofgren (D-CA) have introduced resolutions in Congress opposing mandatory collection by online retailers of sales and use tax.
A perfect storm has developed to permit passage of anti-Quill legislation. The current legislation being considered does not provide significant protection to industry members. It is up to direct marketers to let their positions be known.
As we wrote in our post on August 8, the Main Street Fairness Act, which was sponsored by Senators Durbin, Johnson, and Reed, does not provide meaningful measures to simplify the arduous burden of sales and use tax collection. The Marketplace Fairness Act (and its House counterpart) would provide even less simplification than does the Main Street Fairness Act. It is ironic that despite the unfairness of this proposed legislation to catalogers, online retailers, and other direct marketers, the Marketplace Fairness Act is more likely to pass than prior legislative efforts, because of the increased number of sponsors from both political parties, as well as the coalition of states, industry groups, and big retailers (including e-commerce giant Amazon.com), that have announced their support for this new bill. Thus, the alarm bells should be ringing loudly for Internet and other direct marketers.
Critical Additional Feature of the Marketplace Fairness Act
The Marketplace Fairness Act would extend collection obligations well beyond the Main Street Fairness Act to authorize any state that has not adopted the Streamlined Sales and Use Tax Agreement (“SSUTA”), but has adopted negligible simplification measures, to require tax collection by remote sellers.
If adopted, the Main Street Fairness Act would permit states that become members of the SSUTA to require companies without a physical presence in the state to collect sales and use tax in the states. (There are 24 states that are members of the SSUTA). The Marketplace Fairness Act, on the other hand, incorporates this authorization and then expands it to permit any state that implements (in the language of the proposed legislation) “minimum simplification requirements” to require catalogers, online retailers, and other companies that have national annual sales greater than $500,000 to collect the state’s sales tax on sales to residents of the state.
The Marketplace Fairness Act is Anything But Fair
Although the SSUTA provides some protection to remote sellers from the burden and expenses of sales tax collection, the “simplification requirements” of this new bill provide even fewer benefits to catalog and e-marketers, and increased burdens.
There simply is nothing in this new bill that provides meaningful simplification for remote sellers. In other words, there is no provision for uniformity in sales tax laws among states; the simplification is only within the state, and the term “simplification” even within the state is a misleading term, at best.
We have discussed the SSUTA in various posts, which is incorporated, in effect, into that Act. As we have written previously, the SSUTA does not provide significant relief from administrative burdens and expenses of sales tax compliance. Just as under the SSUTA, the Marketplace Fairness Act does not ease the tax burden by requiring common exemptions throughout the states, uniform treatment for shipping and handling charges, and a consistent definition of the selling price for determining the amount subject to sales tax.
Similarly, like the SSUTA, the Marketplace Fairness Act permits the imposition of many combined (state and local) rates within a state based on the destination of the sale, thus potentially permitting a large number of different tax rates on sales to residents of the state, in addition to the thousands of tax rates a remote seller would be required to impose on its sales throughout the country. While the Marketplace Fairness Act specifies that a state must provide adequate software and services to identify the destination local rate and to hold harmless remote sellers from liability for mistakes made by a provider of sales tax administration services, this clause does not eliminate the administrative burden, expense, and risk to a remote seller of billing for, and collecting, sales and use taxes at different rates on its sales throughout the country.
Moreover, the Marketplace Fairness Act adds another layer of complexity that is not even present for the SSUTA. The SSUTA does provide for common definitions of some terms to be used in the sales tax statutes of the member states. The SSUTA also requires uniform rules among the member states for the deduction by a retailer of bad debts. The Marketplace Fairness Act does not require states to adopt such definitions and uniform rules regarding bad debts. The result is that if this new Act were adopted, a remote seller would be potentially subjected both to the definitions and bad debt rules of the SSUTA states and the differing and varying definitions and bad debt rules set forth in the statutes of the more than 20 non-member states.
There is a Real Possibility that the Marketplace Fairness Act Will be Adopted
Unlike prior state efforts to persuade Congress to enact laws eliminating the Quill physical presence test, there is increasing support from both Democrats and Republicans and from diverse industry groups for the Marketplace Fairness Act.
Over the past 20 years, the states have repeatedly caused legislation to be introduced in Congress to abolish the nexus physical presence requirement. The likelihood of successful adoption of the Marketplace Fairness Act, however, differs from prior legislative efforts for several important reasons:
- There is significant support from both Democrats and Republicans in Congress.
- The states are facing large financial problems (including mounting and huge pension costs), while federal funding for the states is drying up because Congress is not receptive to providing funding to assist the states at the expense of other federal programs or increased taxes.
- The legislation is supported by big box retailers.
- Well-funded associations such as the National Retail Federation and the International Council of Shopping Centers support the law.
- Amazon had been one of the most vigorous opponents of prior legislation. Now, Amazon is offering the service of collecting tax on behalf of other retailers for a fee of 2.9% of the taxes collected.
The only ray of light in this gloomy picture is that Senators Wyden (D-OR) and Ayotte (R-NH) and Representatives Lungren (R-CA) and Lofgren (D-CA) have introduced resolutions in Congress opposing mandatory collection by online retailers of sales and use tax.
A perfect storm has developed to permit passage of anti-Quill legislation. The current legislation being considered does not provide significant protection to industry members. It is up to direct marketers to let their positions be known.
Monday, August 8, 2011
Bills Introduced in Congress to Override Quill in Favor of Streamlined Sales and Use Tax Agreement
On July 29, 2011, the so-called “Main Street Fairness Act” was introduced in both houses of Congress. The bills, introduced as H.R. 2701 in the House of Representatives and as S. 1452 in the Senate, are identical. Under the proposed law, Member States in the Streamlined Sales and Use Tax Agreement (SSUTA) would be authorized to require remote sellers (i.e., Internet retailers and other direct marketers with no physical presence in the state) to collect and remit state and local sales and use taxes notwithstanding the substantial nexus standard established by the Supreme Court in Quill Corp. v. North Dakota. There are currently 24 full and associate member states in the SSUTA, representing approximately 36% of the population of the United States. Many larger states, including California, Florida, Illinois, New York, Pennsylvania and Texas are not SSUTA members.
Similar bills have been introduced in past sessions of Congress, including in 2003, 2006, 2007 and 2010. Brann & Isaacson Senior Partner, George Isaacson, has testified with regard to such prior legislation in 2003, 2006, and 2007 that the SSUTA has not achieved the goal of genuine simplification and uniformity of states sales and use tax systems. The requirements imposed on states by the current Congressional bills are substantially identical to prior versions and, in some respects, are even less demanding for states. In addition, H.R. 2701 and S. 1452 contain no express minimum level or “small seller” exemption that would protect smaller retailers from the obligation to collect use tax in all member states. Instead the bills defer to small seller exemptions established by the SSUTA states themselves.
We will keep you apprised of further developments regarding the bills.
Similar bills have been introduced in past sessions of Congress, including in 2003, 2006, 2007 and 2010. Brann & Isaacson Senior Partner, George Isaacson, has testified with regard to such prior legislation in 2003, 2006, and 2007 that the SSUTA has not achieved the goal of genuine simplification and uniformity of states sales and use tax systems. The requirements imposed on states by the current Congressional bills are substantially identical to prior versions and, in some respects, are even less demanding for states. In addition, H.R. 2701 and S. 1452 contain no express minimum level or “small seller” exemption that would protect smaller retailers from the obligation to collect use tax in all member states. Instead the bills defer to small seller exemptions established by the SSUTA states themselves.
We will keep you apprised of further developments regarding the bills.
Wednesday, July 28, 2010
Proponents of Streamlined Sales Tax Legislation Remain Unwilling To Pursue Genuine Simplification, While Exaggerating The Amount Of Uncollected Use Tax on eCommerce Sales
Earlier this month, Massachusetts Congressman Bill Delahunt introduced H.R. 5660, “a Bill to promote simplification and fairness in the administration and collection of sales and use tax, and for other purposes.” H.R. 5660 represents the latest effort by Congressional allies of the Streamlined Sales and Use Tax Agreement (“SSUTA”) to promote legislation that would overturn the substantial nexus standards that limit states’ power to impose sales and use tax collection obligations on out-of-state sellers, as reaffirmed by the Supreme Court in Quill v. North Dakota
Sadly, H.R. 5660 represents no real promotion of simplification of state sales and use tax systems over the level of improvement introduced in prior bills which fell far short of the mark. Indeed, H.R. 5660 is nearly identical to a bill introduced by Mr. Delahunt in 2007 that endorsed the SSUTA, the shortcomings of which Brann & Isaacson senior partner, George Isaacson, explained to Congress in December 2007. Among the fundamental steps toward true simplification that the states have still refused to adopt (and that H.R. 5660 fails to require) are a reduction in the number of state and local taxing jurisdictions, a single sales tax rate for all jurisdictions in a state, uniformity in the tax base, and uniformity in the measure of tax for like transactions, to name just a few.
Furthermore, while further simplification remains elusive, there is growing evidence that states have substantially overstated the amount of revenue they “lose” through uncollected sales and use tax on Internet and other direct marketing sales by out-of-state vendors who are not required to collect such tax under Quill. The SSUTA contingent has long relied upon a study conducted by a group at the University of Tennessee (the “UT Study”), which was most recently updated in April 2009. The UT Study estimates that states will fail to collect between $45-50 billion in sales and use tax on direct marketing sales during the five year period from 2008-2012.
A more recent study, prepared by Jeffrey Eisenach and Robert Litan at Empiris LLC, entitled “Uncollected Sales Taxes on Electronic Commerce: A Reality Check” (the “Empiris Study”) and published in February 2010, presents a compelling critique of the UT Study. The Empiris Study’s Executive Summary powerfully summarizes the study's conclusions, including the fact that total potential uncollected sales tax revenues in 2008 were less than three-tenths of one percent of all state and local tax revenues. Also, it found that more than one-third of such uncollected tax revenues are associated with small businesses that would likely be excluded from use tax collection obligations under a “small business” exemption in federal legislation. Overall, the Empiris Study convincingly shows that the amount of projected uncollected state and local sales and use tax is far less than claimed by states or projected by the UT Study. Indeed, the Empiris Study concludes that “the increased collections associated with overturning Quill would be substantially lower than previously thought,” and would be approximately 33% of the amount estimated by the UT Study.
Such relatively modest amounts of additional tax revenue do not justify imposing the still-significant regulatory and compliance burdens associated with state and local sales and use tax collection that, in part, motivated the Supreme Court’s decision in Quill. The proper solution to the ongoing complexity of state and local sales and use tax systems is true simplification, which H.R. 5660, unfortunately, does not provide.
Sadly, H.R. 5660 represents no real promotion of simplification of state sales and use tax systems over the level of improvement introduced in prior bills which fell far short of the mark. Indeed, H.R. 5660 is nearly identical to a bill introduced by Mr. Delahunt in 2007 that endorsed the SSUTA, the shortcomings of which Brann & Isaacson senior partner, George Isaacson, explained to Congress in December 2007. Among the fundamental steps toward true simplification that the states have still refused to adopt (and that H.R. 5660 fails to require) are a reduction in the number of state and local taxing jurisdictions, a single sales tax rate for all jurisdictions in a state, uniformity in the tax base, and uniformity in the measure of tax for like transactions, to name just a few.
Furthermore, while further simplification remains elusive, there is growing evidence that states have substantially overstated the amount of revenue they “lose” through uncollected sales and use tax on Internet and other direct marketing sales by out-of-state vendors who are not required to collect such tax under Quill. The SSUTA contingent has long relied upon a study conducted by a group at the University of Tennessee (the “UT Study”), which was most recently updated in April 2009. The UT Study estimates that states will fail to collect between $45-50 billion in sales and use tax on direct marketing sales during the five year period from 2008-2012.
A more recent study, prepared by Jeffrey Eisenach and Robert Litan at Empiris LLC, entitled “Uncollected Sales Taxes on Electronic Commerce: A Reality Check” (the “Empiris Study”) and published in February 2010, presents a compelling critique of the UT Study. The Empiris Study’s Executive Summary powerfully summarizes the study's conclusions, including the fact that total potential uncollected sales tax revenues in 2008 were less than three-tenths of one percent of all state and local tax revenues. Also, it found that more than one-third of such uncollected tax revenues are associated with small businesses that would likely be excluded from use tax collection obligations under a “small business” exemption in federal legislation. Overall, the Empiris Study convincingly shows that the amount of projected uncollected state and local sales and use tax is far less than claimed by states or projected by the UT Study. Indeed, the Empiris Study concludes that “the increased collections associated with overturning Quill would be substantially lower than previously thought,” and would be approximately 33% of the amount estimated by the UT Study.
Such relatively modest amounts of additional tax revenue do not justify imposing the still-significant regulatory and compliance burdens associated with state and local sales and use tax collection that, in part, motivated the Supreme Court’s decision in Quill. The proper solution to the ongoing complexity of state and local sales and use tax systems is true simplification, which H.R. 5660, unfortunately, does not provide.
Thursday, March 25, 2010
What’s Next For Sales Tax (a/k/a Use Tax) On Direct Mail?
Direct marketers know that successful eCommerce strategies often depend upon reaching customers offline as well as online. Direct mail, including the distribution of catalogs, remains one of the most effective ways of driving traffic to a website. Indeed, given the reluctance of some consumers to give out their e-mail addresses, and the protections afforded consumers from unwanted solicitation under anti-SPAM, Do-Not-Call and other consumer privacy laws, traditional “snail mail” marketing techniques remain an important way for Internet sellers to communicate directly with customers.
Although several larger states (including California, New York, and Pennsylvania) provide exemptions from tax for certain types of direct mail, the vast majority of jurisdictions treat direct mail as taxable. And in all states, including those that provide exemptions, there are myriad other complex legal issues affecting taxability, including sourcing rules, taxability of postage, “direct mail” certificates, and nexus considerations, each of which make determining the proper sales tax treatment of direct mail transactions challenging. Add the fact that mailings go to recipients in many, if not all 50 states (and countless localities), each of which has its own tax law, and the difficulty of properly applying tax to any particular direct mail transaction multiplies exponentially.
Perhaps due to this complexity, states historically did not aggressively pursue audits or assessments on direct mail. But, those days are gone. In recent years, states and localities have begun focusing more and more on sales and use tax application to direct mail, in part due to attention given the issue by the Streamlined Sales and Use Tax Agreement (“SSUTA”). Although it takes no position on whether direct mail should be subject to tax, the SSUTA project raised the issue’s profile by adopting provisions addressing the sourcing of direct mail transactions. Those provisions were amended in late 2009 to separate the treatment of “advertising and promotional direct mail” from other types of direct mail, such as invoices, notices, etc. But, the provisions do nothing to minimize (and, coupled with other provisions in the SSUTA, arguably aggravate) the complexity of taxation of direct mail.
In the last two years, many of the more aggressive states, particularly non-SSUTA states, began to put pressure on large printers and letter shops to collect the use tax on their sales of direct mail pieces, even on sales to clients that lacked any presence in the state. Internet and direct marketers began to receive unwelcome notices from their printers that they would have to pay tax on large print contracts, adding 7-10% to the already high cost of doing business for direct marketers
Given budgetary problems in states throughout the nation, revenue departments will likely continue to look for ways to boost tax collections from direct mail transactions. Direct marketers need to be aware of this issue prior to entering into any negotiation over print and other direct mail contracts; direct mail firms should understand their potential tax obligations and recognize that they may be able to take steps to minimize their tax exposure and thereby offer more competitive fees to their clients.
Although several larger states (including California, New York, and Pennsylvania) provide exemptions from tax for certain types of direct mail, the vast majority of jurisdictions treat direct mail as taxable. And in all states, including those that provide exemptions, there are myriad other complex legal issues affecting taxability, including sourcing rules, taxability of postage, “direct mail” certificates, and nexus considerations, each of which make determining the proper sales tax treatment of direct mail transactions challenging. Add the fact that mailings go to recipients in many, if not all 50 states (and countless localities), each of which has its own tax law, and the difficulty of properly applying tax to any particular direct mail transaction multiplies exponentially.
Perhaps due to this complexity, states historically did not aggressively pursue audits or assessments on direct mail. But, those days are gone. In recent years, states and localities have begun focusing more and more on sales and use tax application to direct mail, in part due to attention given the issue by the Streamlined Sales and Use Tax Agreement (“SSUTA”). Although it takes no position on whether direct mail should be subject to tax, the SSUTA project raised the issue’s profile by adopting provisions addressing the sourcing of direct mail transactions. Those provisions were amended in late 2009 to separate the treatment of “advertising and promotional direct mail” from other types of direct mail, such as invoices, notices, etc. But, the provisions do nothing to minimize (and, coupled with other provisions in the SSUTA, arguably aggravate) the complexity of taxation of direct mail.
In the last two years, many of the more aggressive states, particularly non-SSUTA states, began to put pressure on large printers and letter shops to collect the use tax on their sales of direct mail pieces, even on sales to clients that lacked any presence in the state. Internet and direct marketers began to receive unwelcome notices from their printers that they would have to pay tax on large print contracts, adding 7-10% to the already high cost of doing business for direct marketers
Given budgetary problems in states throughout the nation, revenue departments will likely continue to look for ways to boost tax collections from direct mail transactions. Direct marketers need to be aware of this issue prior to entering into any negotiation over print and other direct mail contracts; direct mail firms should understand their potential tax obligations and recognize that they may be able to take steps to minimize their tax exposure and thereby offer more competitive fees to their clients.
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