WHO TO CONTACT DURING THE LIVE PROGRAM For Additional Registrations: -Call Strafford Customer Service 1-800-926-7926 x1 (or 404-881-1141 x1) For Assistance During the Live Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN. IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours. To earn credit you must: • Participate in the program on your own computer connection (no sharing) – if you need to register additional people, please call customer service at 1-800-926-7926 ext. 1 (or 404-881-1141 ext. 1). Strafford accepts American Express, Visa, MasterCard, Discover. • Listen on-line via your computer speakers. • Respond to five prompts during the program plus a single verification code. • To earn full credit, you must remain connected for the entire program. SaaS Sales and Use Tax: Reconciling Varying State Rules To Avoid Unforeseen Tax Traps THURSDAY, JULY 18, 2019, 1:00-2:50 pm Eastern FOR LIVE PROGRAM ONLY
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WHO TO CONTACT DURING THE LIVE PROGRAM
For Additional Registrations:
-Call Strafford Customer Service 1-800-926-7926 x1 (or 404-881-1141 x1)
For Assistance During the Live Program:
-On the web, use the chat box at the bottom left of the screen
If you get disconnected during the program, you can simply log in using your original instructions and PIN.
IMPORTANT INFORMATION FOR THE LIVE PROGRAM
This program is approved for 2 CPE credit hours. To earn credit you must:
• Participate in the program on your own computer connection (no sharing) – if you need to register
additional people, please call customer service at 1-800-926-7926 ext. 1 (or 404-881-1141 ext. 1).
Strafford accepts American Express, Visa, MasterCard, Discover.
• Listen on-line via your computer speakers.
• Respond to five prompts during the program plus a single verification code.
• To earn full credit, you must remain connected for the entire program.
SaaS Sales and Use Tax: Reconciling Varying State Rules
To Avoid Unforeseen Tax TrapsTHURSDAY, JULY 18, 2019, 1:00-2:50 pm Eastern
FOR LIVE PROGRAM ONLY
Tips for Optimal Quality FOR LIVE PROGRAM ONLY
Sound Quality
When listening via your computer speakers, please note that the quality
of your sound will vary depending on the speed and quality of your internet
connection.
If the sound quality is not satisfactory, please e-mail [email protected]
Gerald "Jerry" Donnini II is a shareholder who joined the Law Offices of Moffa, Sutton, & Donnini, P.A., as a law clerk in 2010. Mr. Donnini concentrates in the area of Florida and Federal tax matters, with a heavy emphasis on the tobacco, convenience stores and petroleum industries. He also handles a myriad of multi-state state and local tax issues. Mr. Donnini is a co-author for CCH’s Expert Treatise Library: State Sales and Us Tax and writes extensively on multi-state tax issues for SalesTaxSupport.com.
Mr. Donnini also regularly represents cigarette, beverage, and tobacco distributors against the Division of Alcohol and Tobacco in connection with refund claims and audit defense. While at Nova Southeastern University, Shepard Broad Law Center, Mr. Donnini was the Notes and Comments Editor of Nova Law Review and Vice President of the Sports and Entertainment Law Society. Prior to attending law school at Nova in 2008, Jerry was an accountant for National Retail Properties, Inc. Mr. Donnini earned his L.L.M. in Taxation at New York University.
Education:
◦ New York University School of Law, L.L.M., Taxation (2014)
◦ Nova Southeastern University, J.D., magna cum laude (2011)
◦ University of Central Florida, B.B.A, Accounting (2007)
APPLICATION SERVICE PROVIDERS (ASPS)o Entity that retains custody over (or “hosts”) software for
use by third parties.
o Software users typically use the Internet to access software hosted by an ASP.
o ASP may or may not own or license the software, but generally owns or maintains the hardware and networking equipment required for the user to access the software.
• When the ASP owns the license for the software, they may charge the user a license fee and/or a maintenance fee for the software/hardware used by the user.
SOFTWARE AS A SERVICE (“SAAS”)o The SaaS model allows consumers to use the provider’s
software application that runs on a cloud infrastructure.
o The applications are accessible from various client devices through interfaces such as a web-browser (e.g., web-based email).
o The consumer does not manage or control the underlying cloud infrastructure including network, servers, operating systems, storage, or application capabilities.
o A service agreement is usually executed under the SaaS model, unlike an ASP (may be a software license agreement or a service agreement).
o SaaS model is familiar to most Internet users, and includes offerings such as web-based email, calendars, word processing, and digital photo applications (e.g., Google docs or Gmail).
PLATFORM AS A SERVICE (“PAAS”)o PaaS model allows the consumer to run consumer-created or
acquired applications on the cloud provider’s platform.
o Consumer does not manage or control the underlying cloud infrastructure, including the network, servers, operating systems, or storage; but they have control over the deployment of applications and possibly the application’s hosting environment configuration.
INFRASTRUCTURE AS A SERVICE (“IAAS”)o The IaaS model provides the consumer with processing,
storage, network capabilities, and other fundamental computing resources in which the consumer may deploy and run software.
o While the consumer does not manage or control the underlying cloud infrastructure, they do have control over operating systems, storage, deployed applications, and possibly limited control of specific networking components (e.g., host firewalls).
o Examples of IaaS models include web hosting and managed services (e.g., Amazon Web Services (“AWS”) or Microsoft Azure).
◦ Wash. Rev. at retail" or "retail sale" also includes the sale of prewritten computer software to a consumer, regardless of the method of delivery to the end userCode § 82.04.050(6)(a)
Nontaxable
o Florida
• “Tangible personal property” means and includes personal property which may be seen, weighed, measured, or touched or is in any manner perceptible to the senses.
CANNED VS. CUSTOM SOFTWARECannedo A software product or solution, usually purchased from a
software company, which cannot be modified or altered beyond the original functionality.
• Connecticut◦ “Tangible personal property” means personal property
which may be seen, weighed, measured, felt or touched or which is in any other manner perceptible to the senses including canned or prewritten computer software. ◦ Conn. Gen. Stat. § 12-407(a)(13).
Customo Software created to meet the needs of a particular customer. • West Virginia
◦ "Sale" means any transaction resulting in the purchase or lease of tangible personal property,custom software or a taxable service from a retailer.◦ W. Va. Code, § 11-15A-1(9).
How did the states develop their cloud computing guidance? Example: Washington State
Remote Access
Software
Digital Automated
Service
Digital Good
SoftwareServices that use software
Books, music,
video, data, facts,
information
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Cloud computing / software / data
processing?
▪ Taxability of cloud computing varies by state.
▪ Not taxable because:
▪ The customer does not have physical possession of the item; therefore, it is not a sale or lease of software or tangible personal property.
▪ The vendor’s server is not in the state.
▪ The product is not canned or prewritten software and is not an enumerated taxable service.
▪ Taxable because:
▪ The customer has “constructive possession” of the item; therefore, it represents a taxable sale or lease of software despite no physical transfer of the item.
▪ The server is a single-tenant server; therefore, it is a taxable lease of tangible personal property despite no physical possession.
▪ It is within the meaning of an enumerated taxable service.
▪ Customer receives benefit of a taxable service such as data processing or information service in the state.
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Arizona
▪ Arizona was one of the first states to issue a ruling that specifically referenced cloud computing.
▪ Cloud services treated as the taxable license of TPP. TIR No. LR10-007 (Mar. 24, 2010). Gross receipts derived from hosting software were subject to the transaction privilege tax. Letter Ruling 11-011 (Jun. 22, 2011).
▪ The Arizona Department of Revenue has stated its position that it will treat software licenses as the equivalent of tangible personal property, including licenses of hosted software. Consequently, the Arizona Department of Revenue has taken the position that a software license is to be taxed as a retail sale of tangible personal property if it is for a perpetual or indefinite period. LR13-005 (Ariz. Dep’t of Revenue April 29, 2013).
▪ Liability for sales tax on the gross receipts from hosting software for Arizona customers, pursuant to the Ariz. Rev. Stat. Ann. §42-5071. If the software license only allows a customer to access or use the software for a limited timethen the software license is taxed as a rental of tangible personal property.
▪ Arizona Department of Revenue issued a decision, determining that subscription income from online database was subject to transaction privilege tax. Arizona DOR Director's Decision No. 201400197-S, 10/27/2015
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Rhode Island
▪ Advisory 2018-38, Rhode Island Division of Taxation, September 4, 2018
▪ Advisory issued as a reminder that as of October 1, 2018, SaaS will be subject to sales and use tax.
▪ Tax will apply regardless of whether access to or use of the software is permanent or temporary, and regardless of whether it is downloaded.
▪ Applies to everything from cloud based Excel to online dating and job-search programs.
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Illinois
▪ General Information Letters issued taking the position that a SaaS provider is a serviceman and therefore subject to the Service Occupation Tax (SOT) rather than the Retailer’s Occupation Tax (ROT). General Information Letter ST 16-0035-GIL, Illinois Department of Revenue, August 17, 2016; General Information Letter ST 16-0034-GIL, Illinois Department of Revenue, August 17, 2016.
▪ If the SaaS Provider does not require or provide for any download of any software including an API, applet, desktop agent or a remote access agent, then no tax should apply.
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Chicago
▪ On June 9, 2015, the Chicago Department of Finance adopted Personal Property Lease Transaction Tax Ruling #12 to provide guidance on the taxability of cloud computing, software, and related products.
▪ The ruling clarifies that the Chicago personal property lease transaction tax applies to the use of personal property, including a non-possessory computer leases, unless the charges are exempt.
▪ The Department noted that if a customer pays a provider for the ability to use the provider's computer to ‘input, modify or retrieve data or information’ then the charge is for the customer's use of the computer, and is taxable. Originally, the effective date of the ruling was July 1, 2015.
▪ However, on August 7, 2015, the Chicago Department of Chicago Department of Finance announced it would delay the effective date until January 1, 2016, in response to concerns from the city’s technology sector. Chicago Dept. of Revenue Personal Property Lease Transaction Tax Ruling No. 12 (6/9/2015); Chicago Dept. of Revenue Informational Bulletin (11/19/2015)
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Chicago
▪ Currently, computer software provided through a cloud-based delivery system — is not subject to tax. The Department continues to review cloud-based arrangements. If, after review, the Department determines that these transactions are subject to tax, it will only apply this determination prospectively.
▪ A provider of software as a service is acting as a serviceman. If the provider does not transfer any tangible personal property to the customer then the transaction generally would not be subject to Retailer’s Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax.
▪ If a provider of a service provides to the subscriber an API, applet, desktop agent, or a remote access agent to enable the subscriber to access the provider’s network and services, it appears the subscriber is receiving the computer software.
▪ Although there may not be a separate charge to the subscriber for the computer software, it is nonetheless subject to tax, unless the transfer qualifies as a non-taxable license of computer software. If the provider is not otherwise required to be registered under Section 2a of the Retailer’s Occupation Tax Act and qualifies as a de minimis serviceman, the provider could elect to pay Use Tax on its cost price of the computer software. See Ill. Dept. of Rev., Illinois General Information Letter ST 17-0007-GIL (Mar. 2, 2017).
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Iowa
▪ Effective January 1, 2019, Iowa expanded its taxable enumerated services to include Software as a Service (“SaaS”) and over fifty other new services.
▪ Additionally, Iowa imposes sales tax on specified digital products. Taxable digital products include digital audio works, digital books, digital movies, and electronic games.
▪ Exemption for the purchase of SaaS and specified digital products used exclusively by commercial enterprises.
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Idaho
▪ Idaho’s 1965 definition of tangible property is that which a person could “feel, touch, lift.”
▪ In 1986, Idaho included software in the definition of tangible property, regardless of the delivery method. In this manner, Idaho’s statutory construct was deemed open-ended and seemed archaic as applied to the cloud computing products flooding the market.
▪ Technology industry leaders fought back against the Commission’s view. The Idaho Tech Council submitted a position paper urging the Commission and legislators to work together on reform efforts, and suggested adopting the approach taken by states such as Kansas, which find cloud computing services non-taxable because they lack a transfer of tangible personal property.
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Idaho
▪ On April 3, 2013, Idaho’s legislature enacted an exemption, effective immediately, for cloud computing products. L. 2013, H243 (c. 271); codified as
Id. Code § 63-3616(b).
▪ Idaho – Summary
▪ statute: Remotely accessed software is not TPP. Idaho Code 63-3616(b).
▪ Previous ruling: Department gave narrow interpretation to prior statutory exemption.
▪ For Idaho tax purposes, there is an exclusion from the definition of taxable “tangible personal property” for the following: computer software that is delivered electronically; remotely accessed computer software; and computer software that is delivered by the load and leave method where the vendor or its agent loads the software at the user's location but does not transfer any tangible personal property containing the software to the user. In this context, the term “remotely accessed computer software” means computer software that a user accesses over the Internet, over private or public networks, or through wireless media, where the user has only the right to use or access the software by means of a license, lease, subscription, service, or other agreement.
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Michigan
▪ The Michigan Department of Treasury recently issued guidance related to Auto-Owners, a case regarding the taxability of prewritten computer software delivered or accessed through the Internet. Auto-Owners Insurance Company v. Department of Treasury, Dkt. No. 321505 (Mi. Ct. App. 10/27/2015)
▪ Taxable prewritten computer software delivered by any means requires that set of coded instructions be conveyed or handed over by any means and that the customer exercise control over the software conveyed
▪ Mere transfer of information and data via customer accessing the software does not constitute “delivery” by any means of prewritten computer software
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Michigan
▪ In Auto-Owners, the Michigan Court of Appeals determined that the majority of software contracts between an insurance provider and third party companies were not subject to taxation under Michigan's Use Tax Act (UTA) because they did not involve the delivery of prewritten computer software.
▪ The Court of Appeals also determined that prewritten computer software was only an incidental component of the professional services purchased by the insurance provider and did not subject the charges to tax.
▪ As a result of this and other similar cases, the Department of the Treasury indicated that it will apply the guidance in Auto-Ownersretroactively to all open tax years, despite contrary guidance issued by the Department prior to the date of the decision. Notice to Taxpayers Regarding Auto-Owners Insurance Company v. Michigan Department of Treasury (1/6/2016)
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▪ Sales tax is on receipts from transfers of ‘‘title or possession’’ to items of tangible personal property.” NY Position: Cloud computing sales made by ASPs are taxable licenses to remotely use prewritten software.
▪ NY Definition of TPP includes prewritten software. There is no legislative guidance as to when a license to use exists regarding software. (‘‘Rentals, leases, and licenses to use’’ includes all transactions in which there is a transfer for a consideration of “possession of tangible personal property without a transfer of title.”
▪ Online services constitute sale of pre-written software. See Adobe Systems Inc., TSB-A-08(62)S; TSB-A-09(19)S (May 21, 2009); TSB-A-10(2)S (January 20, 2010); TSB-A-10(44)S (Sept. 22, 2010); TSB-A-11(17)S (June 1, 2011), TSB-A-13(22)S (July 25, 2013).
▪ Remote access to canned software is taxable. Taxpayer deemed to have constructive possession of the software via "right to use or control or direct the use" of the software. The situs of the sale was the location associated with the license to use (i.e., the location of the taxpayer’s employees that use the software). TSB-A-09(37)S, New York Commissioner of Taxation and Finance, Aug. 25, 2009); TSB-A-13(22)S (July 25, 2013).
New York
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Tennessee
▪Charges for data storage and retrieval were not taxable. Let. Rul. No. 11-38 (July 27, 2011).
▪Fee for access to software housed outside of TN not taxable because there was no transfer of possession or control. Let. Rul. No. 11-58 (Oct. 10, 2011).
▪Fee for access to online databases of applications was not subject to tax because there was no transfer of possession of the applications. Tenn. Rev. Rul. No. 13-03 (Jan. 14, 2013).
Then…
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Tennessee
▪Charges for affiliate-hosted software, vendor-hosted software, and internally-hosted software are all subject to sales and use tax in Tennessee.
▪Effective July 1, 2015, software accessed remotely is subject to tax in Tennessee. Internally hosted software is subject to Tennessee sales and use tax insofar as the purchased software is physically or electronically transferred to the taxpayer in Tennessee.
▪However, charges incurred for software that is purchased and downloaded or installed in locations outside of Tennessee, and remotely accessed by the taxpayer in Tennessee, are not subject to tax. Letter Ruling No. 15-09, Tennessee Department of Revenue (12/17/2015, released 1/20/2016)
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Washington
▪ Charges made to consumers for the right to access and use prewritten computer software, where possession of the software is maintained by the seller or a third party, is also subject to sales and use tax, regardless of whether the charge for the service is on a per use, per user, per license, subscription, or other basis. Wash. Rev. Code §82.04.050(6)(b) ; Wash. Admin. Code §458-20-15502(10)(b) ; Washington State Department of Revenue, Digital Products Bills (ESHB 2075 & SHB 2620), 05/03/2010.
▪ Charges for the right to access and use prewritten computer software, where possession of the software is maintained by the seller or a third party, are subject to tax, regardless of whether the charge for the service is on a per use, per user, per license, subscription, or other basis. See discussion above. [Wash. Rev. Code §82.04.050(6)(b) .] Data processing does not include the service described in Wash. Rev. Code §82.04.050(6)(b) . [Wash. Rev. Code §82.04.192(3)(b)(xv) .]
▪ Certain B-2-B exceptions apply. ▪ Sales tax does not apply to the sale of prewritten computer software
or remote access prewritten software if the buyer provides the seller with an exemption certificate claiming multiple points of use (MPU). [Wash. Admin. Code §458-20-15502(11)(a) .]
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Washington ▪ The taxpayer, a provider of cloud based fax, messaging and email
services, argued that its services should be considered data processing services taxable under the service and activities B&O classification.
▪ Department of Revenue has classified the taxpayer's fax and messaging services as telecommunications services and its email services as digital automated services. The Appeals division stated, with regard to the taxpayer's faxing and messaging services, that the services were provided, in part, through third party communications providers and that faxing services have long been held to constitute telecommunications. The taxpayer's faxing and messaging services were not data processing services because the taxpayer's customers contracted with the taxpayer to send transmissions to their own customers, not to extract or process data. Similarly, the taxpayer's email services were not considered data processing services because the taxpayer was not engaged for the primary purpose of “reformatting or extracting” its customers' data, but, rather for the customization and personalization of emails. The taxpayer's email services were deemed to be digital automated services.
▪ The taxpayer did not qualify for exemption under the ITFA because the taxpayer was not an email provider (the taxpayer only provided a service applicable to emails provided by other parties) and did not provided personal storage. Washington Tax Determination No. 14-0307, 09/23/2014, 35 WTD 51.
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Broader Effects of Wayfair
• Wayfair addressed the sales/use tax collection responsibility of a retail seller of tangible personal property, but the case will have broader import.
• Potentially affected companies include:
• Providers of hosted software and digital goods.
• Inbound foreign sellers.
• Service providers.
• Wayfair impacts extend beyond just sales/use tax
• Potentially affected taxes may include:
• Income/franchise taxes.
• Gross receipts taxes.
• Taxes based on paid in capital or net worth.
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Broader Effects of Wayfair
• Businesses selling SaaS, cloud computing, and digital goods/services to end users, which lack a large nexus footprint, may now be subject to additional sales/use tax collection responsibilities.
• How are sales sourced in determining whether Wayfair thresholds are met?
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SaaS Sales and Use Tax: Reconciling Varying State Rules to Avoid Unforeseen Tax Traps
• Use of Certificates of Multiple Points of Use Certificates
• Nexus
• Provider
• User
• Identifying the Service: Primary Object
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Sourcing Issues: Single Location User Within Same State
As Server
• Delivery within the state by cloud computing provider situated in the state
• All states treat this as an intra-state sale and subject to tax in the state of service if the state taxes cloud computing services.
• No other state has nexus with the transaction and could tax the sale under the Commerce Clause. See Goldberg v. Sweet, 488 U.S. 252 (1989).
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Sourcing Issues: Single Location User Within Same State
As User• Some states tax SaaS if purely intrastate access but not if it is
interstate service.
• E.g., In SC SaaS would be taxable as a communications service. See SC DOR Ruling #05-13.
• SC does not tax interstate communications services. Code 1976 §§ 12-36-1920; 2120(11)(a)(exempts “toll charges for the transmission of voice or messages between telephone exchanges.”)
• E.g., In MS SaaS is not taxable if servers located outside of Mississippi, but taxable if servers where software resides located in MS. See MS Admin. Code 35-IV-5.06 (300).
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Single Location of User But Different States of Server and User
• Customer uses SaaS in one state but not where software is housed
• All but a few jurisdictions that tax SaaS source SaaS where the user is located.
• New York Department of Taxation and Finance TSB-A-11(17)S, June 1, 2011. ("We conclude that the hosted marketing service constitutes the sale of prewritten software and its charges for that service are subject to sales and use tax.") Id. ("If the client’s employees who use the software are located both in and outside of New York State, Petitioner should collect tax based on the portion of the receipt attributable to the client’s employee users located in New York."); Also see TSB A-16(8)S (3/15/16)
• AZ Dept. of Rev., LR 16-011, 9/23/16; LR 15-005 5/14/2015. (The location where the lessee uses the leased property on a non-temporary basis is what is determinative.)
• Chicago personal property lease transaction tax: Transaction Tax Ruling No. 12, 6/9/15.
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Single Location of User But Different States of Server and User
• The following jurisdictions impose transaction taxes based on the location of the server, irrespective of the location of the user.
• NM gross receipts (sales) tax: tax is imposed on IaaS or data processing (but not SaaS) only if servers are located in NM. N. M. Stat. Ann. §7-9-3.5. ("Gross Receipts" include "the total amount of money or the value of other consideration received from selling...services performed outside New Mexico, the product of which is initially used in New Mexico, or from performing services in New Mexico."). As to SaaS, however, taxed based on where users are located. NM Taxation and Revenue Dept. Ruling No. 401-13-1 (January 2013).
• FL sales tax: Florida taxes the “rental of a computer and its related components…which is physically located in this state,” but “[w]hen the computer is located outside this state, the rental of the computer is not taxable.” Fla. Admin. Code Ann. r. 12A-1.032(2), (3).
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Sourcing Issues: Users Located in Multiple States
• Customer uses SaaS in several states where software is not housed
• NY approach: Provider responsible for tax based on users in NY: Provider must receive customer’s confirmation of the ratio of New York-based employees with access to the service (including detailed information as to their location) to the number of employees with access. Provider relieved of liability for non-NY employees but still liable for tax for NY-based employees. TSB-A-11(17)S (6/1/11); TSB-A-10(52)S (10/18/10).
• Chicago Approach in Transaction Tax Ruling No. 12: Similar to New York (based on location of users within City limits)
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Sourcing Issues: Users Located In Multiple States
• OH approach (Provider not responsible for collecting any
tax): R.C. 5739.033(D)
• If the purchaser provides a certificate of multiple points
of use or a direct pay permit, the vendor is relieved of
collection responsibility, and the purchaser may use any
reasonable, consistent and uniform method of
apportioning purchases by jurisdiction.
• In the absence of an exemption certificate, the vendor
and customer can work out a reasonable, consistent and
uniform method of apportionment and the customer
certifies to the same.
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Users Located In Multiple States: Certificate of Multiple Points of Use
• At one time the SSUTA provided for a certificate of Multiple
Points of Use to eliminate or reduce the provider’s requirement
to collect tax on its sales to multiple states. This provision of
the SSUTA was repealed.
• Despite the repeal, many states (including SSUTA members),
but not all states, permit a retailer to accept a certificate of
multiple points of use.
• Some states require the retailer to collect tax only with
regard to the proportion of users in the state.
• NY; NC (Form E-595E)
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Users Located In Multiple States: Certificate of Multiple Points of Use
• Other states do not require the seller to collect the state's sales tax,
but place the obligation on the purchaser to remit tax to the state
and every other state where the users are located. See KS and OH
MPU Sourcing Certificates; MI Sales and Use Tax Exemption
Certificate; and VT Regulation Section 1.9701 (8)-4;
• MA, SD, TN, WA additionally do not require seller to collect
sales tax.
• TX does not require provider to collect the sales/use tax, but relies
on purchaser to pay tax if purchaser has provided an exemption
certificate comparable to the certificate of multiple points of use
used in other states.
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Special Sourcing Issues
• A common issue that many providers face is that they do not know the
address of the users of the service
• SSUTA Twenty-four member states: AR, GA, IN, IA, KS, KY, MI,