Cover Your SAAS – Issue III

Welcome to the third edition of Cover Your SaaS. Following a brief mid-summer hiatus from which the authors returned pale as ever, we dive once more into the cloud computing and digital product SALT developments you and your clients should be aware of. This is a bumper edition, so we have organized the updates by general topic rather than solely by jurisdiction. Let us know what you think of the changed format for the newsletter. We will continue archiving updates by jurisdiction on HMB’s website. If you have follow-up questions, please let us know.

Digital Advertising Taxes

The Slice from New York

Headline

• New York Addresses Sales Tax Treatment of Digital Advertising Analytic Services

Authority

• New York State Advisory Opinion TSB-A-20(3)S (April 28, 2020).
• https://www.tax.ny.gov/pdf/advisory_opinions/sales/a20_3s.pdf

Context

• An anonymous New York taxpayer provides internet advertising analytics services to its clients via a software-based subscription model. Clients provide the taxpayer with their login credentials to advertising platforms they use, allowing the taxpayer to download and analyze their relevant data. The taxpayer uploads the results and reports them to the clients daily in a single consolidated database. Clients also use an online dashboard to select from a menu of services provided by the taxpayer and specify the format of deliverable reports. In a requested opinion, the Department explained that these services constitute nontaxable personal information services rather than the taxable sale of a software subscription because the primary function of the taxpayer’s service is to compile and analyze advertising metrics. Providing access to an online dashboard and allowing clients to access their information and select the formatting of reports does not change the nature of the underlying nontaxable service provided by the taxpayer.

Why It Matters

• This sales tax opinion comes at a time when the New York legislature is considering imposing special gross receipts taxes on digital advertising services that use personal information to create targeted advertisements. The proposed taxes would be imposed directly on the person deriving income from digital advertising rather than on persons such as our anonymous taxpayer who provide services to the advertiser. If passed, the proposed tax would apply to taxable years after January 1, 2021. It remains to be seen whether a new gross receipts tax would inspire an expansion of the sales tax base to include transactions such as those discussed in this opinion, but the current fiscal condition of New York suggests that such an expansion would not be a surprise.

The “Dumpster Fire” in the District

Headline

• D.C’s “Dumpster Fire” Engulfs Digital Ad Tax

Authority

• The Council of the District of Columbia, B23-0760 – Fiscal Year 2021 Budget Support Act of 2020.
• https://lims.dccouncil.us/Legislation/B23-0760

Context

• July in the District is always an experience, but the D.C. Council’s consideration of a new tax on digital advertising services made last month particularly interesting. On July 6^th, the D.C. Council released its 2021 budget, which included a proposed amendment expanding the sales tax to advertising services, including digital advertising services. This expansion would take effect on October 1, 2020 at a reduced 3% rate instead of the standard 6% rate. Commentators immediately seized on the proposal, likening it to the proposed and controversial taxes in Maryland, Nebraska and New York, (discussed in Issue II) and raising concerns that the digital portion of the tax would violate the Internet Tax Freedom Act. Just as in these other states, the stated purpose of the tax was to capture “big ads” on internet giants with two o’s in their name. Unlike these states, the proposed tax is not a new and separate tax, but rather an expansion of the sales tax base. Controversy over the proposed tax rumbled on through July, culminating at a contentious Council budget meeting on the 21^st described by Council Member Elissa Silverman as a “dumpster fire.” The proposed tax was itself placed in the dumpster several days later.

Why It Matters

• D.C’s proposed tax highlights two key trends in state taxation: first, the arrival of Digital Services Taxes (DSTs) and second, the need to plug massive budget deficits resulting from COVID-19. As mentioned in our previous issue, significant constitutional questions surround DSTs but the need to balance budgets may outweigh the risk of litigation. D.C.’s proposed DST was also more refined than other DST proposals, indicating that legislatures recognize the challenges associated with DSTs, but are willing to push forward to open new revenue streams.

Marketplace Facilitators

New York

Headline

• New York Bill Proposes Requiring Rental Platforms to Collect Tax

Authority

• New York Senate Bill 8627 (2020).
• https://www.nysenate.gov/legislation/bills/2019/s8627

Context

• Proposed legislation seeks to require hosting platforms to collect and remit tax, acting as a hotel operator for short-term rentals offered on the platform. The bill, proposed specifically to address budget shortfalls resulting from COVID-19, would go into effect on January 1, 2021.

Mississippi

Headline

• Software Sales Added to Marketplace Facilitator Collection Obligation

Authority

• Mississippi Department of Revenue, Notice to Marketplace Facilitators 72-20-04 (Jun. 25, 2020).
• https://www.dor.ms.gov/sites/default/files/Business/72-20-04%20MARKETPLACE%20FACILITATORS%20%281%29.pdf

Context

• Effective July 1, 2020, marketplace facilitators who are subject to Mississippi’s sales tax jurisdiction are required to collect sales tax on sales of software and specified digital products including audio-visual works, audio works and electronic books.

Vermont

Headline

• Vermont to Require Marketplace Facilitators to Collect Universal Service Charge

Authority

• Vermont House Bill 954 (2020)
• https://legislature.vermont.gov/bill/status/2020/H.954

Context

• Vermont, like many states, imposes both sales tax and a “universal service charge” on the sale of prepaid wireless telecommunication services. H.B. 954 proposes to require marketplace facilitators collecting sales tax on these sales to also collect the universal service charge. The bill has been adopted by both houses of the Vermont legislature and is currently awaiting the governor’s signature. If signed, the collection requirement will go into effect on July 1, 2021.

Why These Matter

Marketplace facilitator legislation has sprung up quickly across the country in the wake of “Wayfair” economic nexus legislation. Anecdotal evidence suggests that this legislation was originally intended to only require large marketplace operators such as Amazon and eBay to collect and remit sales taxes on behalf of third parties selling through their platforms. However, many marketplace facilitator statutes are drafted broadly enough to include much smaller marketplaces. As states continue to refine and even expand their marketplace facilitator statutes, keeping up with collection obligations is more important than ever. In addition, as evidenced by the proposed legislation in New York, these marketplace facilitator rules are not limited to sellers of tangible personal property. They can also apply to sharing platforms that make rooms, parking spaces and car rentals available to the public. The proposed New York legislation, for example, would require a hosting platform like Airbnb to collect any applicable occupancy tax.

Digital Products

Rhode Island

Headline

• Rhode Island Streamlines Digital Goods Definitions

Authority

• Rhode Island S.B. 2650 Sub A and H.B. 7532A

Context

• Rhode Island has fully adopted the Streamlined Sales and Use Tax Agreement (SSUTA) but was found to be out of compliance in October 2019 due to its treatment of specified digital goods. Under the SSUTA, states which tax specified digital goods should impose tax only on end users that have the permanent right to use the product. Furthermore, any tax should not be contingent on continued payments unless those conditions are explicitly set forth in the statute. Prior to amendment, Rhode Island’s statute did not clearly indicate whether sales tax applied if subscriptions were required or if the right to use was not permanent.

Streaming Tax

Illinois

Headline

• Illinois Municipal League Circulates Model Municipal Streaming Tax Ordinance

Authority

• Revised Illinois Municipal League Model Ordinance: Municipal Streaming Tax
• https://www.iml.org/page.cfm?category=4882

Context

• The Illinois Municipal League, a statewide organization of municipal officials, has issued a model ordinance for amusement taxes. The model ordinance follows Chicago’s controversial Amusement Tax and provides a blueprint for other municipalities to quickly implement their own version of the tax.

Why It Matters

• As discussed in the prior issue, Chicago imposes a 9% Amusement Tax. The Chicago Department of Finance applies the amusement tax to streaming services (think Netflix or Apple Music) and this position was upheld earlier this year by the Illinois Appellate Court. Evanston, Chicago’s erudite northern neighbor, implemented its own streaming tax earlier this summer. At that time, Evanston was the only other municipality that had formally considered an amusement tax, but this model ordinance suggests that other Illinois municipalities will soon be following suit.

Tennessee

Headline

• Certain Online Courses Subject to Sales Taxes

Authority

• Tennessee Department of Revenue, Letter Ruling No. 20-04 (Jun. 10, 2020).
• https://www.tn.gov/content/dam/tn/revenue/documents/rulings/sales/20-04.pdf

Context

• While taxing on students, university courses led by a live instructor are not themselves subject to sales taxes because students are paying for nontaxable professorial services. In this letter ruling requested by the taxpayer, a business offering online career prep courses provided students with access to text-based course modules via an online account and tested their knowledge using online written tests. The learning modules were not guided by a live instructor, but participants were able to contact an instructor outside of the online course. After reviewing these facts, the Department determined that the courses are subject to sales tax because the true object of this transaction is access to taxable computer software rather than nontaxable access to live instruction.

Why It Matters

• Providers of distance learning solutions will be more in-demand than ever as classes resume in the fall. This may be a boon for the bottom line, but providers should review the taxability of their online offerings to avoid flunking any sales tax examinations that states may choose to hand out. As is often the case in the cloud computing space, if the transaction involves the remote access of hosted software, a sales tax might very well be due in the state where the user accesses the software.