Tax Tips – February 2010

“Multiple Points of Use” Doctrine Survives and Thrives
(Update from October 2009 edition; click here to read archived article).

INDIANA

It has scarcely been three months since we discussed the tenacity of the Multiple Points of Use (MPU) doctrine in various forms and jurisdictions in the face of its formal repeal by the Streamlined Sales Tax (SST) Governing Board in late 2006. Now Indiana has revealed its affirmation of the MPU doctrine.

A taxpayer protested the imposition of Indiana use tax on payments for the use of certain software that it accessed over the internet-i.e., in a web-based software program. Following an administrative hearing, the Indiana Department of Revenue found that, “As long as the web-based software program is also not designed and developed to the specifications of a specific purchaser, the web-based software program is prewritten computer software that constitutes tangible personal property. The fact that a computer software program is accessed via the Internet as opposed to on the customer's own computer is irrelevant to the taxability of the program; the program in whatever form constitutes tangible personal property, and the [software] company's charges for access to the program is subject to sales and use tax.” Indiana Letter of Findings: 09-0418 (posted January 27, 2010)

Based on our discussions with representatives from the compliance division of the Indiana Department of Revenue, the contra would also be true; i.e., software purchased by a taxpayer and resident on its server in Indiana but accessed by its employees outside of Indiana would not likely be subject to sales and use tax (depending on the taxpayer’s unique facts and circumstances). This could be an important consideration for taxpayers located in Indiana or considering favorable tax locations for establishing a computer “hub” or shared services center.

Nexus, I Presume?

NY, NC, RI, CO, MS, NM, VT, VA, CA

A number of states are considering legislation similar to New York’s nexus presumption law that was adopted by the State in 2008. Under the New York law, remote sellers are deemed to have nexus if they enter into agreements with residents who receive a commission for directly or indirectly referring potential customers to the seller. This quickly became known as the “Amazon” law or tax, as many believe that Amazon.com, one of the world’s largest e-tailers, was the target of this legislation. More information regarding this law can be found in TSB-M-08(3)S. In 2009, North Carolina and Rhode Island enacted legislation similar to New York’s, while bills with nexus presumption provisions were vetoed by the governors of California and Hawaii.

Since the start of the year, nexus presumption bills (with language similar to the New York law) have been introduced in Colorado, Maryland, Mississippi, New Mexico, Vermont, and Virginia. The passage of these bills is by no means guaranteed, however. The bill introduced in the Mississippi legislature died in the Senate Finance Committee in early February; and the bill introduced in New Mexico was tabled by the Business & Industry Committee of the state House of Representatives in late January. A nexus presumption bill introduced in January 2009 in the California Assembly has also died due to a lack of action (any bill introduced during the first year of a legislative session that has not been passed by January 31 of the second calendar year of the session may no longer be acted on).

Even though the states are continuing to look for ways to expand the tax base and force remote sellers to register and collect taxes in their jurisdictions, they must be cognizant that their efforts may not always be well received, especially by taxpayers who are wary of any new taxes being imposed. It should also be noted that many non-SSUTA states may be holding off on introducing new nexus legislation until Amazon’s lawsuit against New York has been decided. This may be the first nexus case that the Supreme Court of the United States hears since the Quill decision in 1992, when it ruled that the taxation of interstate commerce should be resolved by Congress.

Almost 18 years later, there is still no resolution.

Exempt sale documentation

Does your company have a policy for maintaining exempt sale documentation? When was the last time anyone reviewed your company’s resale and exempt sale documentation?

Most taxpayers look at their exempt sale documentation the week before the sales tax auditor is scheduled to arrive. The usual finding is that the documentation is woefully inadequate. Common problems are:

1) No exempt certificate on file
2) Expired certificate
3) Incomplete certificate
4) Invalid certificate

A few simple procedures performed periodically can greatly reduce your company’s audit exposure. The first step toward avoiding problems with your company’s exempt documentation is to devote all the necessary company resources to obtaining the required documentation before the auditor arrives. Eleventh-hour scrambling to obtain such documentation can be avoided by having a plan in place to obtain exempt sale documentation.

The second step involves maintenance – review exempt documentation periodically to ensure the documentation is accurate and complete. Missing or incomplete certificates should be obtained as soon as possible. Obtaining sales exemption documents becomes more difficult as time passes from the date of sale. It also increases the likelihood that unforeseen circumstances such as customer ownership changes or business closings could occur, thereby making it impossible to obtain a valid exemption certificate.

In many states, exemption certificates do not expire. However, certificates can become invalid for a number of reasons including specified time period, specified purchase or change of ownership. A policy to validate or update certificates on a periodic basis will reduce the occurrence of invalid certificates.

Review your company’s current policy to determine if it is adequate. If your company does not have a policy, consider implementing one. A well executed plan will save a great deal of time and reduce audit exposure when the next audit occurs.

NEW: State Amnesty Programs At-a-Glance, updated monthly.

¹ Streamlined Sales Tax amnesty program does not
include use tax due on purchases or any other taxes..

Note: New York State has established a Penalty and Interest Discount (PAID) program to encourage eligible taxpayers to pay off qualifying tax liabilities that are at least three years old. The program began on January 15, 2010 and runs through March 15, 2010. Depending on when the assessment or final determination was issued, eligible taxpayers will only have to pay the tax due plus 20% of the accrued interest and penalties if an assessment was issued on or before December 31, 2003; or, 50% of the accrued interest and penalties if an assessment was issued after December 31, 2003. The Department of Taxation and Finance was to have sent written notices to eligible taxpayers starting in early January 2010. If you believe you are eligible for this program and did not receive a notice from the State, participation instructions should be available on the State’s website. Please note that the PAID program differs from a typical amnesty program as eligibility is limited to only those taxpayers with outstanding tax liabilities that are at least three years old. All other taxpayers with unknown liabilities should consider using the State’s Voluntary Disclosure program to remit their outstanding tax due.

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