Vermont Reverses Course on Cloud Computing

A little over a year ago, we wrote in this space about the State of Vermont’s moratorium on the taxation of cloud computing in the form of software as a service, or SaaS (“pre-written software accessed remotely” in the state’s terminology). The moratorium had been enacted in the wake of outcry from Vermont-based software companies, who objected to assessments for unpaid taxes on SaaS charges going back to 2006, based on a technical bulletin issued by the Department of Taxes in 2010.

At the time the moratorium was passed in 2012, there was some support for permanently exempting SaaS from Vermont’s sales and use tax, and Vermont’s governor had come out in favor of an exemption. A special study committee set up to make recommendations to the legislature on the issue also supported exempting SaaS from taxation. However, legislators were ultimately unable to agree on cuts elsewhere in the budget to make up for loss of anticipated revenue from SaaS taxes. As a result, the moratorium was allowed to expire, meaning that, as of July 1, charges for SaaS are taxable in Vermont. Because the moratorium applied only to taxes on SaaS, its expiration does not affect the tax treatment of other types of cloud computing, such as infrastructure as a service or IaaS.

Because Vermont, like many states, continues to struggle with the application of old definitions to new technology, determining whether a given cloud computing transaction will be taxable under Vermont’s law requires a careful analysis of the individual transaction. The key issues in this determination are whether the object of the transaction can be characterized as a sale of taxable tangible personal property (including software) or whether it is really the sale of a service. If the transaction is a sale of software, it must then be determined whether it is prewritten or custom software. Vermont imposes its sales and use tax on prewritten computer software, whether accessed remotely as is the case with SaaS, downloaded, or purchased on a tangible medium such as a CD. Custom software, designed to the specifications of an individual purchaser, is not taxable. Additionally, while pre-written software is taxable, services are not. Merely using the term “Software as a Service” to describe a cloud computing transaction, however, will not transform the transaction from a sale of software into the sale of a service under Vermont law, since pre-written software is taxable, regardless of how it is accessed. Instead, vendors should determine whether what they are selling is properly characterized as not software at all, but instead is an exempt service such as data processing.

The Vermont Department of Taxes has stated its intention to promulgate formal regulations on the topic of cloud computing, but has in the meantime published an information sheet providing basic guidelines on its taxation. The information sheet includes a number of factors to consider in determining whether Vermont’s sales and use tax applies to a given transaction. Sellers would be wise to consult with their tax counsel regarding the tax and its impact on their businesses.

Despite Prior Veto, Missouri Governor Signs Click-Through Internet Affiliate Nexus Provision into Law

As we reported last month, on June 5, Missouri Governor Jay Nixon vetoed a bill that included an Internet affiliate nexus provision. What a difference a month makes. On July 5, Governor Nixon signed a different bill, S.B. 23, that amends Missouri’s definition of “engages in business activities in this state” under Mo. Stat. § 144.605(2) to add a presumption of nexus for retailers with “click-through” online advertising agreements with residents of the state. Under the Missouri statute, “a vendor shall be presumed to engage in business activities within this state if the vendor enters in an agreement with one or more residents of this state under which the resident, for a commission or other consideration, directly or indirectly refers potential customers” to the vendor by an Internet link or otherwise, so long as the vendor realizes at least $10,000 in sales from such referrals. The presumption may be rebutted by submitting proof that the affiliates were not engaged in activities that were significantly associated with the retailer’s ability to make or maintain a market for sales in the state. In particular, such proof may consist of “sworn written statements from all of the residents with whom the vendor has an agreement stating that they did not engage in any solicitation in the state on behalf of the vendor during the preceding year.” See Mo. Stat. 144.605(e), (f).

The Missouri statute continues a disturbing trend among state “click-through” Internet affiliate nexus laws under which a presumption of nexus is created regardless of whether the compensation paid to the in-state affiliate is based on sales completed by the retailer. Statutes recently enacted in Kansas, Maine, and Minnesota contain similar language, as do statutes already on the books in Arkansas, North Carolina, Rhode Island, and Vermont (although Vermont’s statute is not yet in effect). By the plain terms of such statutes, a passive “pay-per-click” advertising arrangement would be sufficient to create a presumption of nexus. Such a presumption is inconsistent with the reasoning of the New York Court of Appeals’ decision upholding the New York affiliate nexus law. See Overstock.com, Inc. v. Department of Taxation and Finance, 20 N.Y.3d 586 (2013). In Overstock, the Court emphasized that “no one disputes that a substantial nexus would be lacking if [in-state] residents were merely engaged to post passive advertisements on their websites.” 20 N.Y.3d at 596. These several states’ affiliate nexus statutes are at odds, on their face, with this fundamental principle.

Despite Unconstitutionality, Kentucky Enacts Consumer Use Tax Notification Requirement for Out-Of-State Retailers

On April 4, 2013, Kentucky Governor Steve Beshear signed into law HB 440. The bill includes an amendment to Kentucky’s tax code which will impose a new requirement on every retailer that makes sales into Kentucky from outside the state and that is not required to collect Kentucky use tax. The law requires that these retailers provide a notice to their customers that Kentucky purchasers are required to report and pay use tax directly to the Kentucky Department of Revenue. A similar provision enacted in Colorado in 2010 as part of a broader notification and reporting bill was declared unconstitutional by a federal judge in Direct Marketing Association v. Huber, a case now on Appeal before the 10th Circuit Court of Appeals. Brann & Isaacson is counsel to the DMA in the Colorado litigation.

While three other states—Oklahoma, South Dakota, and Vermont—have similar consumer use tax notification requirements on the books, Kentucky’s new law is more aggressive:

First, on its face, Kentucky’s law requires retailers to use “the exact required use tax notification language” set forth in the statute concerning compliance with Kentucky law, and does not include a substantial compliance provision likes other states. According to the statute, even if a seller already has a notice provision for other states, that notice provision is only adequate for purposes of Kentucky law “if the consolidated notification meets the requirements of this section.” In other words, only the “exact” language of the Kentucky law, and not something substantially similar that a retailer adopts in response to another state’s notification law, appears to be allowed.

Second, the Kentucky statute expressly applies to “online auction Web sites.” It is not clear whether the requirement is meant to apply to the auction site itself, or whether it means that retailers selling through an auction site must arrange for display of the notice with respect to their own sales. But note that there is a small seller exemption that exempts any retailer with sales of less than $100,000 to Kentucky residents from having to comply with the statute.  This may lessen the impact of the Kentucky law on Internet auction sites.

Third, while South Dakota and Vermont each provide that there can be no civil or criminal penalties for a retailer’s failure to comply with the use tax notification provision, Kentucky has no such non-enforcement clause. The Oklahoma statute is likewise silent on enforcement and, in practice, the Oklahoma notice law has not been enforced by the state’s Tax Commission. It remains to be seen whether the Kentucky Department of Revenue will bring enforcement actions, but nothing in the new law appears to prevent it.

For more details on the new Kentucky consumer use tax notification statute and how it might affect an out-of-state retailer’s website check-out screens and catalog order forms, ecommerce vendors and other remote sellers should consult their tax advisors.

Connecticut Amends Its Affiliate Nexus Law To Mirror Illinois

We have written frequently in recent months about affiliate nexus legislation introduced this legislative session in a number of states, and enacted recently in Illinois, Arkansas, Connecticut and, on a deferred basis (to take effect only after 15 states have adopted similar legislation) Vermont. (A similar bill has been passed in California, but has not yet been signed by Governor Brown.) Nearly every such bill has closely paralleled the affiliate nexus law adopted in New York in 2008, which provides for a presumption of nexus that can be rebutted by a retailer if the retailer can establish that its in-state affiliates have not engaged in any active solicitation in the state, but have merely posted online advertisements on behalf of the retailer that link to the retailer’s website. Illinois was the only state to adopt a law without such a rebuttable presumption.

The Connecticut legislature has now amended the affiliate nexus statute it passed in May 2011, to eliminate the rebuttable presumption and, instead, to closely mirror the Illinois law. Connecticut HB 6652, signed by Governor Malloy on June 21, repeals the affiliate nexus statute adopted in May, and instead modifies the definition of “retailer” (as well as the definition of “engaged in business in the state”) to classify as a Connecticut retailer any company that has affiliate relationships with persons in Connecticut pursuant to which the affiliates refer customers to the retailer in return for commissions or other consideration based on sales, via an online link or otherwise. The retailer must realize cumulative gross receipts of at least $2,000 on sales to Connecticut customers as a result of such referrals in order to be “engaged in business in the state.” In addition, HB 6652 makes the change in the definitions of “retailer” and “engaged in business” retroactive to May 4, 2011 – prior to the date on which the previously enacted affiliate nexus law was even adopted.

It warrants mention that the Connecticut legislature amended its affiliate nexus statute after the Performance Marketing Association filed suit in federal court in Chicago challenging the constitutionality of the Illinois law. Brann & Isaacson represents the PMA in that action.

The Lone Star State Follows a Different Path Regarding Nexus

Bucking the trend of other states, Texas’ Governor recently vetoed proposed legislation to expand the scope of the Texas sales and use tax law regarding collection of sales and use tax. The proposed legislation—HB 2403—was approved by both houses of the Texas legislature, but vetoed by Governor Perry on May 31. This legislation was not as aggressive as that in other states that have recently adopted nexus legislation. (Illinois, Connecticut, Arkansas and Vermont are examples). It merely provided that a retailer has nexus with Texas if it has an affiliated company that operates a distribution center in Texas or if an affiliated company located in Texas performs services on behalf of the retailer or sells under the same brand name as the retailer. This was in part directed at the Amazon situation in which an affiliate of Amazon.com operated a distribution center in the state of Texas (that reportedly led to a $269 million assessment of sales tax by the Texas Comptroller of Public Accounts).

A piece of good news for sellers of digital goods does result from the legislature’s work on the bill. The legislation, as introduced, also provided that use by a remote seller of a website on a server in Texas from which digital goods are sold or delivered creates nexus. However, the House Committee that first reviewed the bill removed the language before submitting the bill to the full House for a vote. This may signify that such activity does not create nexus in Texas. But, before embarking on any such activity in Texas, a seller of digital products should examine carefully the Texas law and applicable constitutional cases in light of the proposed sales activity.

It is also noteworthy that Texas is not yet done. The legislature has before it in committee a Bill—HB 1317—that would be similar to the recently-enacted Arkansas and Connecticut laws that provide for a presumption of nexus for any retailer that pays a commission or other consideration to a company located in Texas which provides a link to the retailer’s website. While the legislature adjourned on May 31, it was back in session last week and this week to consider various budget-related issues, and may reconvene yet again. It may be that this click-through legislation would be deemed legislation that the legislature will be permitted to consider under its authorization for reconvening.

Stay tuned to developments in Texas.

UPDATE: SB1, currently under review by the legislature, has been amended to include the nexus legislation vetoed by the Governor on May 31, as discussed above.  We will track the progress of the Bill and keep you posted concerning any further developments.

May News Roundup: Michigan Repeals MBT; Louisiana Proposes Click-Through Nexus Legislation

On Wednesday, Governor Snyder signed into law Michigan’s new corporate income tax, which will replace the Michigan Business Tax. The new corporate income tax, effective January 1, 2012, uses a single factor (sales) for apportionment purposes and has a flat rate of 6%. However, despite the repeal of the MBT, the new corporate income tax will retain the economic nexus standard of $350,000 in gross receipts, which we have written about previously here. Any business with a physical presence of at least one day in the state would also be required to report the corporate income tax. Unlike the MBT, however, P.L.86-272 applies to the tax and provides some protections, as we have most recently written about here. Internet sellers and direct marketers should consult their tax counsel regarding the significance of the new tax and its impact on their businesses.

In other news, this week, the Louisiana legislature threw its hat into the ring of states proposing click-through nexus laws with H.B. 641. We have written previously about nexus-expanding legislation throughout the country here and here. Although Vermont and Texas legislatures recently passed their own versions of the law, as of this writing, the governor in each state has yet to sign the bill. We will keep you posted as developments arise.

Have a safe and festive Memorial Day, all!

Additional States Introduce Affiliate-Nexus Legislation

On March 2, an Internet-affiliate nexus bill was introduced in the Arkansas State Senate (SB 738). Arkansas joins Arizona, California, Connecticut, Hawaii, Illinois, Massachusetts, Minnesota, Mississippi, New Mexico, Tennessee, Texas, and Vermont, as the thirteenth state this legislative season to consider such a measure. Nearly all of the bills -- with the exception of Illinois’s HB 3659, which was passed by the Illinois legislature and is now awaiting signature or veto by Governor Quinn, and Connecticut’s SB 5545 -- are patterned directly upon the New York affiliate nexus law enacted in 2008 and challenged in court, so far unsuccessfully, by Amazon.com. In other words, 11 of the 13 proposed laws create a rebuttable presumption that an out-of-state Internet retailer is obligated to collect and remit the state’s sales and use taxes if the retailer enters into an agreement with an in-state resident (an “affiliate”) pursuant to which the affiliate places a link from the affiliate’s website to the retailer’s site, and the retailer realizes at least $10,000 in sales to customers referred to it by the affiliate’s links. The presumption can be negated by proof that the in-state affiliates did not engage in any in-state solicitation on behalf of the retailer.

In its November 2010 ruling, the Appellate Division of the New York Supreme Court found that the ability of a retailer to rebut the presumption of solicitation was an important factor in determining that the New York law is not unconstitutional on its face. The Court, however, remanded the case for further proceedings on the issue of whether the law violates the Commerce Clause and Due Process Clause as applied to specifically to Amazon. As the ongoing proceedings in the New York case make clear, the constitutionality of such “New York-style” affiliate-nexus legislation is far from resolved.

At the same time, it is worth noting that the Illinois and Connecticut bills differ from the New York law in that neither bill provides that the presumption that a retailer must collect sales and use tax as a result of having in-state Internet affiliates may be rebutted. Imposing an irrebuttable presumption of nexus is highly suspect under both the Commerce Clause and Due Process Clause. Without a rebuttable presumption in place to protect retailers, Illinois and Connecticut would subject Internet retailers to burdensome state tax collection obligations when the retailers are effectively doing nothing more than advertising. For that reason, the progress of each of these bills bears watching. Stay tuned.

Maine Introduces Modified, Colorado-Style Notice and Reporting Law, Which Also Likely Violates The Commerce Clause

On February 9, 2011, the Maine Legislature introduced a bill (LD 469) which would impose upon certain out-of-state retailers a set of notice and reporting obligations that closely parallel the requirements of Colorado’s 2010 law, H.B. 10-1193. Enforcement of H.B. 10-1193 was recently enjoined by a federal judge in Denver on the grounds that such requirements are likely unconstitutional and in violation of the Commerce Clause. As we have reported in prior posts, Brann & Isaacson represents the Direct Marketing Association in the federal court challenge to the now-suspended Colorado law, after which the Maine bill is patterned.

Maine’s LD 469 includes all three of the Colorado law’s notice and reporting requirements – retailers must provide the Transactional Notice, Annual Purchase Summaries to customers, and Customer Information Reports to revenue officials – and would impose penalties on affected retailers for non-compliance with the law.  Notably, however, unlike the Colorado law, the Maine bill includes no $500 annual minimum purchase threshold to trigger the requirement that an affected retailer must send a customer an Annual Purchase Summary. Similar to Colorado’s law, under LD 469 such annual summaries to customers must include, if available, “[d]escriptions of items purchased,” as well as dates and amounts.  Also in contrast to Colorado, the report to Maine Revenue Services must include all of the information provided to each purchaser in the annual summary – thereby requiring that at least descriptions of the items purchased by customers of an affected out-of-state retailer be turned over to Maine Revenue Services. The Maine bill thus raises even more significant privacy concerns for Maine consumers buying from affected retailers than does the privacy-invading Colorado law.

The Maine bill also appears to differ from the Colorado law in another respect: whereas the suspended Colorado law applies, by its terms, to all out-of-state retailers that do not collect Colorado sales tax, LD 469 imposes its onerous notice and reporting obligations only upon companies that are presumed to be doing business in the state because they are members of a “controlled group of corporations” that has at least one member who is already a retailer with a physical presence in the state.  The Bill Summary states that “[t]his bill requires out-of-state retailers that are not required to collect sales tax and that are part of a controlled group of corporations with a connection in the State” to comply with the notice and reporting obligations. The apparent requirement that, to be subject to the law, an out-of-state retailer must have an affiliated retailer with physical presence in Maine, means that the proposed law would not apply to as broad a group of out-of-state companies as does the Colorado law.

What the sponsors of the bill apparently fail to recognize is that limiting the notice and reporting obligations to a more narrow group of out-of-state retailers who do not collect sales tax (i.e, only those who are part of a controlled group) does not change the fact that it discriminates against interstate commerce in violation of the Constitution. The Supreme Court has made it perfectly clear that a state cannot pick and choose which out-of-state companies it will discriminate against – even state laws that have imposed disparate treatment upon only a single out-of-state company that is not imposed upon in-state companies are virtually per se invalid under the Commerce Clause.

The prospects for passage of LD 469 are, at this point, entirely uncertain, so there is still time for Maine’s elected officials to avoid following in the footsteps of their Colorado counterparts.  In addition to running afoul of over 180 years of established constitutional law, LD 469 is simply bad policy – invading the privacy of Maine citizens should never be viewed as a proper approach to promoting use tax reporting.

Since the new year, several other states, including Arizona, California, Connecticut, Hawaii, Illinois, New Mexico, South Dakota, Vermont, and Texas, have introduced new notice and reporting bills, or “Amazon” affiliate-nexus legislation.  Stay tuned for an update on the progress of these bills.

Colorado Enacts Law on Gift Cards; Update on Other States’ Cash Redemption Rules

Amidst the hullaballoo over Colorado’s recently enacted affiliate nexus and out-of-state vendor reporting requirements and its recent economic nexus regulation, Colorado also passed a new law regarding gift cards.

Under the new law, signed by Governor Ritter on April 29, issuers of gift cards, including actual cards and electronic cards, must redeem the remaining value of a gift card for cash if there is $5 or less remaining on the card and the holder of the card so requests. Additionally, sellers may not sell gift cards which contain a service fee, dormancy fee, inactivity fee, maintenance fee, or any other type of fee. The new law does not apply to gift cards which are useable with multiple sellers, unless the multiple sellers are affiliated sellers. Violations of the new statute are deemed deceptive trade practices under Colorado law.

Other states have similar laws and/or pending legislation regarding cash refunds for low balances on gift cards and certificates:

California: Currently permits cash refunds for gift certificates with cash value less than $10. See Cal. Civ. Code § 1749.5(b)(2). California has legislation currently before its Senate that would raise the threshold amount to $20.

Maine: Requires cash refunds for gift and stored value cards with less than $5 remaining on request, except in the case of prepaid telephone cards, cards with an initial value of $5 or less, and cards that were not purchased but were provided as a promotion or as a refund where no receipt was provided. See Me. Rev. Stat. tit. 33, § 1953(1)(G).

Massachusetts: For gift certificates to which value may be added and which have been redeemed in part, the holder of the gift certificate may request the remaining balance be paid in cash once its value falls below $5. For gift certificates prohibiting the holder from adding additional value, the holder can request the balance be paid in cash once 90% of the face value has been redeemed. See Mass. Gen. Laws ch. 200A, § 5D.

Montana: Gift certificates with original values of greater than $5, with less than $5 remaining, must be redeemed for cash on request. See Mont. Code Ann. § 30-14-108(4).

Vermont: If the remaining value of a gift certificate is less than $1.00, the gift certificate is redeemable in cash for its remaining value on demand of the gift certificate’s holder. See Vt. Stat. Ann. tit. 8, § 2704.

Washington: If, after a purchase is made with a gift certificate, the remaining value is less than $5, the gift certificate must be redeemable in cash for its remaining value, on demand of the bearer.  See Wash. Rev. Code § 19.240.020(3).

Update: Status of 2010 Affiliate Nexus Legislation

As we reported on March 9, New York-style “Amazon” affiliate nexus legislation was introduced in the 2010 legislative sessions of multiple states.  Even as the North Carolina Department of Revenue has introduced a program intended to entice retailers to register for sales and use tax purposes under its existing affiliate nexus statute (see our recent post for further discussion of the issue), other states are moving closer to adopting similar laws.  At the same time, affiliate nexus legislation has died, for this legislative season at least, in several states.  Here’s an update with regard to such legislation in a number of states:

Moving Forward:

• Connecticut: Bill favorably reported out of committee with recommendation that it “ought to pass”
• Minnesota: Committee hearing on bill scheduled for April 20
• Tennessee: Bill recommended for passage by Tax Subcommittee of Ways & Means, but Tennessee Department of Revenue has indicated that it does not believe mere affiliate relationship would be adequate for nexus

In Committee:

• California: Last action (re-referral to Committee on Appropriations) was April 28, 2010
• Illinois: Last action (referral) was March 19, 2010

Dead (it appears) for 2010:

• Iowa: General Assembly adjourned without acting on the bill
• Maryland: General Assembly adjourned without the bill getting out of committee
• Mississippi: Bill died in committee
• New Mexico: Bill tabled
• Vermont: Ways and Means Committee voted not to include affiliate nexus measure in tax legislation
• Virginia: Affiliate nexus legislation tabled in committee

UPDATE, Aug. 31, 2008:  Please see our most recent post concerning the status of the California Bill here.