Tax Tips – October 2009

“Multiple Points Of Use” Doctrine Survives and Thrives

NEW YORK AND TEXAS

Late in 2006, the Streamlined Sales Tax (SST) Governing Board repealed the Multiple Points of Use provisions of the Streamlined Sales and Use Tax Agreement. Prior to its repeal, the Multiple Points of Use (MPU) provision was a special sourcing rule that applied to a business purchaser of software, digital products and services where the item was “concurrently available for use” in more than one jurisdiction. For example, if a business purchased pre-written computer software for use at its multiple locations, the sale of the software would have been apportioned among the business purchaser’s locations.

The SST Governing Board took this action in response to divisions within the business community of the desired outcome. That being said, for some business taxpayers, the MPU provisions would have resulted in minimizing their sales and use tax burden on software purchases. And now, three years after its repeal by the SST, the doctrine appears to be not only surviving, but thriving, albeit in various forms and jurisdictions.

New York

New York State (not a member of the SST) recently endorsed the MPU doctrine for purchasers of prewritten software in a “software as a service” transaction. New York State Department of Taxation and Finance, Office of Counsel Advisory Opinion Unit, TSB-A-09(33)S. The ruling concludes that:

• the “location of the code embodying the software is irrelevant, because the software can be used just as effectively by the customer even though the customer never receives the code on a tangible medium or by download . . .


• The accessing of Petitioner's software by Petitioner's customers constitutes a transfer of possession of the software, because the customers gain constructive possession of the software, and gain the “right to use, or control or direct the use” of the software . . .


• The situs of the sale for purposes of determining the proper local tax rate and jurisdiction is the location associated with the license to use (i.e., the location of the subscriber's employees that use the software).”

As a result, one may presume that even if software is delivered to New York, it may not be entirely taxable in New York – an important consideration for taxpayers located in New York or considering favorable tax locations for establishing a computer “hub” or shared services center.

Texas

The retailer, 7-Eleven, attempted to achieve a MPU-like outcome by characterizing its purchase of financial software in Texas as a purchase for resale to its out-of-state company and franchise stores. The Texas Court of Appeals found that 7-Eleven was entitled to a resale exemption from Texas sales tax on its purchase of the software that it transferred to out-of-state franchise stores. But the Court remanded the issue of whether 7-Eleven was entitled to the exemption on software that it transferred to its out-of-state company stores (there was no evidence in the record of what 7-Eleven did with the software during the intervening period of time after it was removed from 7-Eleven’s “tax free” inventory and before it was installed in the out-of-state company stores). 7-Eleven, Inc. v. Combs, Texas Court of Appeals, Third District, No. 03-08-00212-CV, August 31, 2009. Proceedings will apparently continue at the trial court consistent with Court of Appeals opinion.

Economic Nexus

CONNECTICUT

Connecticut is the latest state to enact legislation establishing “economic nexus” as the standard for determining whether out-of-state corporations (with no physical presence in the state) are subject to the state’s business tax. This legislation also applies to nonresident partners or members of a partnership or S corporation. Accordingly, a company that derives income from sources in the state or has “substantial economic presence” (i.e., purposefully directs business towards the state) in Connecticut, would be subject to the corporation business tax. Indiana, Massachusetts and Wisconsin, are among the states that have recently imposed economic nexus standards for out-of-state companies. Typically, this standard has been used by states to assert nexus to out-of-state financial services or intangible holding companies, however, other types of companies could have economic nexus with a state, especially due to the amount of business being done today though electronic commerce. As physical presence becomes less and less important for conducting business, watch for more states to impose economic nexus standards to broaden their tax base and improve collections.

Interestingly, the Governor of Connecticut did not sign the budget bill containing this legislation, allowing the bill to become law without her signature, according to the state constitution. The governor did exercise her line-item veto power to eliminate approximately $8 million of earmarks and other so-called “pork-barrel” spending items added to the budget.

Good Strategy, Poor Execution

NEW YORK

Identifying a strategy to minimize taxes is one thing; executing the strategy properly is altogether different. In the matter of Mohonk Oil Company, Inc., New York Division of Tax Appeals, Administrative Law Judge Unit, DTA No. 822274, August 27, 2009, the petitioner learned this lesson the hard way.

At least a part of the petitioner’s overall strategy in the transaction was to transfer property to a related corporation without incurring a sales tax liability. They apparently relied on New York State Tax Law Section 1101(b)(4)(iv)(D) which provides for an exclusion from the definition of retail sale for the transfer of property to a corporation upon its organization in consideration for the issuance of stock. However, the petitioner transferred property in August, 2006 to a corporation that was formed in 2002.

The Division of Taxation successfully argued that the transfer of assets several years after the formation of a corporation did not qualify for the exclusion allowed for transfers “upon organization” or a “reasonable time” thereafter. Note that New York Regulation 20 NYCRR 526.6(d)(5)(iii) specifically states that the transfer of assets to a dormant corporation, which is being activated, are not eligible for the exclusion.

Mohonk is a good reminder that in implementing any good tax strategy, the “devil is in the details”!

EW: At-a-Glance State Amnesty Chart, updated monthly.

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

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