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Digital Economy Update: Administrative Guidance, Noteworthy Cases and Legislation

We recently launched the Sutherland SALT Digital Economy Forum, which provides comprehensive state tax resources regarding the taxation of the digital economy. Following is

February 20, 2013

We recently launched the Sutherland SALT Digital Economy Forum, which provides comprehensive state tax resources regarding the taxation of the digital economy. Following is a summary of recent digital economy administrative guidance, noteworthy cases and legislation. If you would like to learn more about the Sutherland SALT Digital Economy Forum or any of the issues covered here, please contact us.

Sales, Use and Other Transaction Taxes

Administrative Guidance

  • Massachusetts Soliciting Comments on Software Directive. On February 7, the Massachusetts Department of Revenue issued a draft directive that addresses the application of the Massachusetts sales and use tax to sales of software and computer-related services.
  • Wisconsin Updates Guidance Regarding the Sales and Use Tax Treatment of Computer Hardware, Software, and Services; Addresses Cloud Computing. On January 25, 2013, the Wisconsin Department of Revenue (DOR) updated its software guidance for sales occurring on and after October 1, 2009. While the taxability conclusions and destination-based sourcing regime remain largely unchanged, the DOR expressly addressed software as a service (SaaS), platform as a service (PaaS), and infrastructure as a service (IaaS).
  • Missouri DOR: Computer Software May Not Be Eligible for Manufacturing Exemption. The Missouri Department of Revenue (DOR) recently determined that a company’s software programs were not eligible for the manufacturing equipment exemptions from sales and use tax because the software was not directly used in the manufacturing process.
  • New York: Downloadable DIY Piece of the Pie. The New York State Department of Taxation and Finance concluded that the receipts from the sale of downloadable electronic patterns were not subject to sales and use tax under New York Tax Law §§ 1105(a) and 1110(a).
  • Utah and Virginia: You’re the True Object of My Transaction. Utah and Virginia followed the lead of others (including New York and Massachusetts) and issued private letter rulings fleshing out the applicability of sales and use taxes to cloud computing services. The Utah and Virginia rulings address services combined with software access and apply a true object test to characterize the mixed transactions.

Legislative Developments

  • Massachusetts. Mass. H. 1 would impose sales and use tax on data processing and computer services, while reducing the sales tax rate from 6.25% to 4.5%, as part of tax reform efforts in Governor Patrick’s FY2014 Budget.
  • Vermont. Vt. HB 163 would exempt prewritten computer software from Vermont’s sales and use tax when accessed remotely.
  • Michigan. Mich. SB 143 and Mich. SB 142 would amend the definitions of “prewritten computer software” in the general sales tax act and the use tax act, respectively, to clarify that such software “does not include granting the right to use prewritten software installed on another person’s server.”
  • Utah. Utah SB 171 would enact a sales and use tax exemption for electronic financial payment services.
  • Video Games. States continue to send mixed messages to video game developers through sales and use tax legislation. At least two states are considering additional taxes on certain forms of video games, whereas some of those same states are considering credits for video game developers.
  • Data Centers. Finally, states are considering sales and use tax exemptions for equipment and/or software used in data centers.

Corporate Income Tax and Business Activity Tax Developments

Judicial Developments

  • Michigan: Do You Consider Me Royalty? In Proquest Information and Learning, the Michigan Court of Appeals upheld the determination by the Court of Claims that payments received by Proquest from its clients were royalties under the Michigan Single Business Tax Act, and thus were deductible from income subject to the tax.

Legislative Developments

  • Market Sourcing. Adoption of market sourcing continues to be a trend for states, particularly those considering more comprehensive corporate income tax reform.

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