New Hampshire Does Not Tax Internet Access

Reaffirming its state’s anti-tax DNA, the New Hampshire legislature confirmed what some state tax practitioners have been arguing all along: the New Hampshire communications services tax does not apply to Internet access charges. (New Hampshire does not have a sales tax.) On June 21, 2012, the Legislature enacted a statute, 2011 NH 1418, that bars imposition of the communications services tax on “Internet access” charges. The statute also prohibits the New Hampshire Department of Revenue from enforcing any existing assessments of communications services tax on charges for Internet access and requires the prompt withdrawal of any pending assessments. Even though the effective date of the legislation is the date of its enactment, June 21, 2012, the law prohibits the Department from issuing any “additional” assessments with respect to Internet access charges. The statute does not limit the prohibition to Internet access services provided after June 21, 2012, so a fair reading of the statute is that any future assessments for Internet access charges, regardless of when the services were provided, are precluded.

The new law defines the term Internet access in the same way as that term is defined in Section 1105(5) of the Internet Tax Freedom Act (“ITFA”), codified as a note to 47 U.S.C. § 151. The law should apply not only to services provided by Internet Service Providers (“ISPs”) but to services purchased by such ISPs in order to provide Internet access.

Prior to the June 21, 2012 legislation, the New Hampshire Department of Revenue had taken the position that the Communications Services Tax applied to Internet access charges, and that such tax was not prohibited by the ITFA. See New Hampshire Department Technical Information Release, TIR 2008-006, September 15, 2008. In that TIR, the Department took the position that it is grandfathered under the ITFA.

The Department’s argument was a weak one at best. For a state to be grandfathered under the ITFA, in addition to having a statute that taxes Internet access charges, the state must prove that, prior to October 1, 1998, either (i) the state revenue department had issued a rule or other publication that the department had interpreted and applied the relevant tax (e.g., the communications services tax in the case of New Hampshire) to Internet access services (“Agency Notice”), or (ii) the state had generally collected such tax on charges for Internet access services (“General Collection”). In litigation, the New Hampshire DOR has been unable to point to any publication prior to October 1, 1998 that satisfies the Agency Notice prong. Nor are we aware of any ISP paying a sales tax prior to October 1, 1998 on its charges for Internet access services, let alone of a general practice of collection by the Department of the communications services tax on Internet access services prior to October 1, 1998.

In short, the statute recently adopted by the New Hampshire Legislature is good news for ISPs and their customers, as well as network service providers. The law not only codifies an exemption for Internet access charges but also confirms what we have been asserting on behalf of clients previously: Internet access charges are not subject to the New Hampshire communications services tax.

Why would you ever assign a book that cost students money if it is available for free?

eLangdell is offering free Bankruptcy and Securities Law statutory supplement e-books for law school courses; call for textbook proposals

Just finishing up today at the CALI Conference in lovely San Diego at the Thomas Jefferson School of Law.  The new building is super nice if you've not seen it!

The cost of books for our law students is immense.   In case you have not already heard about this from other sources:

CALI publishes free, open books for legal education in electronic and print formats through eLangdell® Press http://elangdell.cali.org/ These e-books are viewable on computers, iPad, iPhone, Nook, and Kindle, or a student can order at cost a hard copy printed and mailed from Lulu.

CALI has partnered with Cornell’s LII to produce free, open statutory e-book supplements for Bankruptcy and Securities law courses:

Securities Law: Selected Statutes and Regulations

s

U.S. Bankruptcy Code and Federal Rules of Bankruptcy Procedure
      

eLangdell is also publishing open access textbooks distributed under a Creative Commons license, although there are none yet in the Commercial Law field (yet, of course). There are statutory supplements for subjects (evidence, civil procedure, bankruptcy, etc).  If you are looking for a Contracts text for Fall, J.H. Verkerke, University of Virginia, has a new eLangdell book out for Fall 2012 adoption.  If you would like to preview it, contact me at jmartin@stu.edu or Deb Quentel of CALI at dquentel@cali.org.

In case you are interested in writing a text for Commercial Law or another subject . . . There is a call for proposals (deadlines October 1, 2012 and April 1, 2013) for textbooks or individual chapters here: http://elangdell.cali.org/content/write-elangdell-casebook-or-chapter

- jsm

Is the EU About to Break the Internet?

In a move that has the potential to do severe damage to the e commerce user experience, some E.U. countries are beginning to implement the E.U. privacy directive on internet cookies (small information files which websites use to remember customers and preferences). In principle, the so-called “Cookie Directive” requires that website users receive explanations of the particular cookies used by a website (except those which are “strictly necessary”) and then actively choose to accept them before the cookies can be automatically stored on the user’s computer. Businesses fear that their retail websites will frighten customers with pop-up boxes of legal language and strange file names. In addition, should users choose not to permit the use of cookies, their browsing and shopping experience stands to be severely compromised, impacting merchant performance.

The UK appears to be in the vanguard of jurisdictions charging ahead with implementation of an aggressive version of the directive. In the May 26, 2012 revisions to Regulation 6 of its Privacy and Electronic Communications Regulations 2003 (“PECR”) and the latest guidance from its Information Commissioner’s Office, the burden is on websites to include:

• An information page providing a general explanation of what cookies are, the file names of the cookies in use on the website and explanations of each cookie’s function;
• A sufficiently prominent link to that page from its homepage; and
• A pop-up box, gateway window, or header/footer bar by which a user must choose to “accept” the cookies from that website after having the option to read the information page.

The directive contains an exception for cookies that are strictly necessary. To be “strictly necessary” means that “such storage of or access to information should be essential, rather than reasonably necessary . . . to what is essential to provide the service requested by the user, rather than what might be essential for any other uses the service provider might wish to make of that data.” The exception does not apply when the cookie is only “‘important’ rather than ‘strictly necessary.’”

Cookies which the ICO indicate as likely to be considered “strictly necessary” are: ( 1) cookies used to remember the goods a user wishes to buy when they proceed to the checkout or add goods to their shopping basket; (2) Certain cookies providing security necessary to comply with EU data protection requirements for an activity the user has requested – for example in connection with online banking services; (3) Cookies that ensure that the content of your page loads quickly and effectively by distributing the workload across numerous computers.

Likewise, cookies which the ICO considers unlikely to be “strictly necessary” include: (1) Cookies used for analytical purposes to count the number of unique visits to a website for example; (2) First and third party advertising cookies; (3) Cookies used to recognize a user when they return to a website so that the greeting they receive can be tailored.

Compliance is required not only from websites hosted in the U.K., but also those around the world so long as they offer products or services to users in Europe. For U.S. companies and their retail websites, the potential £500,000 ($774,500) fine per violation and reluctance to adopt a customer-unfriendly format mean that many would rather block European users from buying over their websites altogether.  

For now, widespread noncompliance even among U.K. websites (An April 2012 KPMG survey concluded that 95% of major U.K. companies were not in compliance U.K. national law implementation) and frequently changing legal guidance from the U.K. Information Commissioner’s Office mean that businesses are taking a wait-and-see approach. Behind the scenes and invisible to users, changes are likely to be already taking place as risk-adverse businesses audit their websites for redundant and obsolete cookies and, perhaps, implement subtle changes which satisfy the letter but not the spirit of the Cookie Directive.

Will the other shoe drop? Many suspect not. Many urge not. The only certainty is that businesses with retail websites will be closely watching the E.U. and U.K. in the months ahead.

Co-authored by David Chen

Some Preliminary Thoughts On The New Maine Board Of Tax Appeals

The Maine Legislature recently voted to create a new, three-member Maine Board of Tax Appeals (MBTA).   The MBTA replaces the Independent Appeals Office that the legislature devised in 2011, which had yet to take effect, and will serve as an independent entity within the Department of Administrative and Financial Regulation.  The MBTA is not part of (or supervised by) Maine’s revenue department (know as Maine Revenue Services (“MRS”)). 

The MBTA will spring into existence as of July 1, 2012.  Obviously, time is short for the MBTA to get up and running.  While the MBTA is intended as a business friendly measure to “provide taxpayers with a fair system of resolving controversies and to ensure due process,” it remains to be seen whether it will be a favorable option/forum for taxpayers.     

Here is how the tax appeals process will work under the new law creating the MBTA:

First, after an assessment is issued, an aggrieved party is required to file, within 60 days of receipt of the assessment, an initial petition for reconsideration with MRS.   Failure to file a petition for reconsideration prevents any further review of the matter by either the MBTA or directly to the Maine Superior Court.

The petition for reconsideration process is intended to be informal, and to create an opportunity for MRS and the aggrieved party to discuss and negotiate.   MRS is empowered to settle issues and cases on the basis of the relevant facts and law, including the hazards of litigation.  There is no obligation on the aggrieved party to make any particular showing or submission to MRS in connection with such discussions and negotiations.

After reconsideration by MRS, a petitioner who remains aggrieved by the outcome may appeal to either the MBTA or the Superior Court.  In either case, the matter is reviewed on appeal de novo, meaning the all issues are open to review, although the taxpayer bears the burden of proof.  If the aggrieved party appeals to the MBTA, the petitioner can control whether the matter will be considered by the Board based on a hearing (with live testimony and oral argument) or, instead, on a written record (including affidavits, documentary evidence and briefs).  In either case, the matter is first evaluated by a “tax appeals officer,” who makes a recommended decision to the Members of the Board.  Unless it decides to send the matter back to the appeals officer for further consideration, the MBTA can adopt, modify, or reject (and enter its own decision) the appeals officer’s recommended decision.

Either the petitioner or MRS may appeal from a final decision of the MBTA by filing, within 60 days of receipt of the MBTA decision, a petition for review by the Superior Court, which reviews the MBTA’s decision de novo.  The Court is empowered to hear any issue, regardless of whether or not it was raised before the Board.   The standard rules of civil procedure (including discovery, etc.) apply in the Superior Court.

Experience over the next few years will show whether the MBTA proves to be an attractive forum for taxpayers seeking a relatively less costly, independent forum for presenting their case, or not.   Assuming that the MBTA demonstrates a degree of independence from MRS (by no means a foregone conclusion), much will depend upon the approach taken by MRS to matters in which the MBTA decides against it.  If the default approach by MRS is to appeal most adverse decisions, the MBTA may only serve to add another layer of administrative expense for taxpayers.  In fact, the preservation of unlimited, de novo review by the Superior Court may considerably limit the MBTA’s value to taxpayers, if the filing of an initial appeal with the MBTA serves only to provide MRS an opportunity to discover the weaknesses in its case, before getting a chance at full discovery in the Superior Court.

Separate from the option of an appeal to the MBTA, it will be interesting to see how MRS exercises its authority to negotiate and settle cases on a more informal basis through the reconsideration process.  The opportunity for settling tax matters in manner that approximates the settlement of contested litigation, before a more formal appellate process is even initiated, may, in the end, prove an even more useful opportunity for taxpayers than the MBTA itself.  Time will tell.

When loan recourse affects mortgage defaults

Sure, home prices pretty much everywhere have dropped from 35% to 55% or more since the housing bubble burst.  (See, Morgan Brennan, Home Prices Are Stabilizing, Signifying A Housing Market Bottom).  Some reports suggest that home prices may be stabilizing and may even start to recover. Id.   That is supposedly there is a bottom to the real estate market.  “Different markets will bottom and recover at different paces depending on a variety of factors this year, including the availability of local jobs and how fast foreclosures can be processed and reabsorbed into local markets.”  Id.  The ten hardest hit states are (as of March 2012):

1.        Nevada (worst)

2.        Florida

3.        New Jersey

4.        California

5.        Louisiana

6.        Illinois

7.        Rhode Island

8.        Mississippi

9.        Arizona

10.    Georgia

See Lending Tree Announces (in case you're wondering, North Dakota has the best housing market).

See, Andrea Ghent, Recourse and Residential Mortgage Default: Evidence from US States.  You might think that this would result in lower interest rates in recourse states as the risk to lenders would seem lower, but the study concluded this was not the case. 

What about those worst hit real estate market states?  Do limits on lender recourse prime a market for greater risk-taking by home buyers?  Perhaps not.  A good study on the comparison of state laws on recourse by lenders was done by James Orlando, OLR Research Report: Comparison of State Laws on Mortgage Deficiencies and Redemption Periods (Revised 12/9/11).   My quick read suggests that the top ten states hardest hit have mixed regulations when it comes to recourse or non-recourse mortgages.  So, perhaps a hard hit real estate market is just that.  The non-recourse will surely help borrowers who need to default (somewhat of a mini-bailout of sorts).  Perhaps the strategic defaulters get a bit of a headwind in these states.  There doesn't seem to be enough data to suggest, though, that the availability of a non-recourse loan was a substantial factor in the decline of the markets in the hardest hit states. 

My suspicion is that most home loan defaulters don't have the assets available to lenders who would pursue a deficiency judgment even if they could under state law.  If defaults are higher in non-recourse states, though, it would seem that either: (i) those in difficulty find it easier to let go where there is no recourse; or (ii) those who can pay act more opportunistically in a way that increases the number of defaults.  Even without recourse, the homeowner who opportunistically walks away from the mortgage does not get a complete free pass due to the impact on their credit report.  And, as Brent White (University of Arizona) has argued, the shame and guilt of walking away is often enough to deter many homeowners.  See, Underwater and Not Walking Away.  So, perhaps the local law doesn't have much impact after all.   

- JSM   

Is It Raining In Pennsylvania: Sales Tax on Cloud Computing Services?

I recently wrote a blog post on the new Vermont law on sales tax on cloud computing services, in which the state placed a moratorium on taxation of software as a service (“SaaS”). Pennsylvania, however, has decided to take a different approach to cloud computing. In Legal Letter Ruling No. SUT-12-001 (May 31, 2012), the Pennsylvania Department of Revenue announced a change in the existing law in Pennsylvania. In particular, the Department’s new approach is that SaaS is taxable in Pennsylvania to the extent that the users of the services are located in Pennsylvania. The Department took the position that the charge for electronically accessing taxable software is taxable because computer software is tangible personal property, and the user “is exercising a license to use the software” within the meaning of 72 P.S. § 7201(o)(1). That section of the statute provides that the exercise or right or power incidental to the ownership of tangible personal property constitutes a taxable “use.”

But this recent ruling, and basis therefor, is inconsistent with the prior ruling of the Pennsylvania Department of Revenue, Legal Letter Ruling No. SUT-10-005, in which the Department held that access to software solely through the internet from a data center located outside of Pennsylvania is not taxable because there is not a taxable transfer in Pennsylvania. Nowhere does the Department of Revenue in its 2012 ruling explain the basis for its ruling that a taxable transfer of the tangible personal property has occurred in Pennsylvania, other than the reference to “recent case law and technological advances.” In the case the Department identifies, Dechart, LLP v. Commonwealth, 998 A.2d 575 (Pa. 2010), the court found that electronically transmitted software downloaded to a computer in Pennsylvania constitutes the sale of tangible personal property in Pennsylvania.

However, there is no tangible personal property that is present in Pennsylvania for software that is accessed remotely from a data center located outside of Pennsylvania. Thus, as I wrote in my article on cloud computing, Let the Sunshine In: The Age of Cloud Computing, State Tax Notes November 28, 2011, and as other states (such as Kansas, Utah and Arizona) have ruled, SaaS should not be taxable in Pennsylvania because the tangible personal property is not transferred in Pennsylvania.

The 2012 ruling took yet another twist. The Department stated that if the customer is billed in Pennsylvania, all of the service will be deemed to be subject to the Pennsylvania sales tax, unless the customer is able to produce an exemption certificate in accordance with Form REV-1220, a form unique to Pennsylvania, that shows the percentage of users outside of Pennsylvania. The form (rev-1220, available here), however, says nothing about a statement of use outside of Pennsylvania. I assume that the “other” box should be filled in together with a statement of the number of non-Pennsylvania users.

This Pennsylvania ruling, therefore, presents another issue for cloud computing service providers who provide their services to customers located throughout the United States. Do they use the Pennsylvania-specific form (adapted as described above) when they have a Pennsylvania customer and a Multistate Points of Use Form, as found in Ohio (available as form STEC MPU, here), for all other customers? Or does the provider use both forms for each customer, regardless of location?

In short, it is prudent for any users billed in Pennsylvania for SaaS to issue an exemption certificate based upon the Pennsylvania Form REV-1220. A multistate cloud computing service provider, at a minimum, should use a form along the lines of the Ohio form and consider using the Pennsylvania form as well.