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Cover Your SaaS – Issue V, Q3 2021

10/04/2021
Practice Groups

As we move into harvest season, we here at Cover Your SaaS (CYS) have cultivated a fresh crop of updates for your enjoyment. Keen observers will note that there has been a somewhat larger gap than usual between newsletters and we admit, it has been a minute. Of course, absence makes the heart grow fonder so we are excited to provide you with the cloud computing and digital product SALT developments that your hearts have been pining for during the summer months. As always, please let us know if you have questions or would like to discuss in more detail how these updates affect your business or your clients’ businesses.

Special Update from the Multistate Tax Commission (MTC) Headquarters

The Headline:

MTC Updates P.L. 86-272 Whitepaper – Deems Internet Activities to be Nexus-Creating

The Authority:

– Multistate Tax Commission, Statement of Information Concerning Practices of Multistate Tax Commission and Supporting States under Public Law 86-272 (4th Revision, adopted Aug. 4, 2021)
https://www.mtc.gov/getattachment/Uniformity/Project-Teams/P-L-86-272-Statement-of-Information-Work-Group/Statement-on-PL-86-272-Adopted.pdf.aspx?lang=en-US

The Context:

The MTC updated its P.L. 86-272 whitepaper (the “Statement”) on August 4, 2021 to finally address activities conducted over the internet. As the first update in twenty years, these changes provoked substantial discussion as they advanced through the MTC committee and continued to do so when shared with the world. So what happened? The updated Statement provides a general rule that businesses which interact with a customer via the business’ website or app are engaged in an unprotected business activity in that customer’s state. However, the Statement also points out that websites which only present static text and photos are a protected business activity. Why does this dividing line matter? Pure static text and photo websites are rarities of the internet – websites developed for a bygone era of low-bandwidth internet connections that could not support the complex websites that we take for granted today. Consider the last three websites that you visited. Odds are good that every one of these sites has interactive features, whether that be a log-in, comment section, or customer service contact portal. Thus, on a very basic level, the Statement proposes that most business’ websites are an unprotected business activity. Following this, the Statement provides a series of examples: customer service chat functions, soliciting and accepting branded credit card applications, soliciting non-sales job applications, persistent cookies, software updates, some marketplace facilitator contracts, and video streaming all defeat a business’ P.L. 86-272 immunity. On the other hand, static FAQ pages and session cookies are all protected activities.

Why It Matters:

Lacking the authority to overturn P.L. 86-272, the MTC instead continues to whittle away at the protections from income taxes it believes out-of-state businesses should enjoy. This is arguably inconsistent with Congressional intent, as Congress could have chosen to amend P.L. 86-272 itself to address internet commerce at any point during the World Wide Web’s thirty-year existence. Nevertheless, states often take their cues from the MTC’s Statement and this latest revision will likely lead to states’ adopting similar positions during next year’s legislative sessions and possibly during audits. This might place businesses between a rock and a hard place, as ecommerce and a vibrant, interactive website are essential in 2021 but filing income tax returns in multiple new states is an unwelcome compliance headache.

Arizona

The Headline:

Arizona Rules that Data Subscriptions Are Taxable Rentals of Tangible Personal Property

The Authority:

– Arizona Private Taxpayer Ruling Letter LR 21-003 (May 27, 2021)
https://azdor.gov/sites/default/files/RULINGS_TPT_2021_lr21-003.pdf

The Context:

Arizona addressed a data and analytics company’s request to know whether its gross income derived from subscriptions to a digital information-gathering service are subject to the state’s Transaction Privilege Tax (“TPT”). Similar to other companies, the taxpayer in this instance complied and continually updated information such as addresses and contact information, which subscribers were then able to access. Subscribers did not gain access to the software taxpayer used to compile and send data and merely obtained the limited right to use the data during their subscription period.

Like some other states, Arizona deems certain non-physical goods such as electricity, software delivered electronically, and music played from a jukebox to be tangible personal property. Following this precedent, the Arizona Department of Revenue concluded that all rentals and sales of data are treated as rentals or sales of tangible personal property, stating categorically that the medium employed in delivering the item does not affect its taxable status.

Why It Matters:

Here at CYS, we like to say that a state can call the sky green as long as it is constitutional – and the sky looks green in Arizona. Fortunately, this is simply a trap for the unwary and data companies should be alert regarding their TPT obligations in order to properly collect taxes owed by Arizona customers.

Maryland

The Headline:

Maryland Draft Digital Advertising Regulations Use Internet Protocol (IP) Addresses in Apportionment Formula

The Authority:

Maryland Proposed Regulation 03.12.01 (Filed with Maryland Joint Committee on Administrative, Executive, and Legislative Review on August 30, 2021). Anticipated to be published in the September 8, 2021 edition of the Maryland Register.

The Context:

Maryland’s massively controversial digital ad tax, which was passed in February over the governor’s veto, is not scheduled to take effect until 2022 and has been challenged in multiple lawsuits. With the Orioles leaving something to be desired, the digital ad tax may be the most intriguing thing to come from the Old Line State this year. The tax is intended to affect only the largest digital advertising companies, defined to include those with more than $100 million of global gross receipts. These proposed regulations provide that affected companies will apportion their digital advertising revenue using a formula with devices that access digital advertising services in Maryland in the numerator and total devices that access digital advertising services from any location in the denominator. Taxpayers determine a device’s location using “information within their possession or control which most reliably identifies a device’s location”, including IP addresses, geolocation data, device registration, cookies, and “any other comparable information”. Any device whose location cannot be determined using this technical information is thrown out of apportionment formula entirely.

Why It Matters:

This is a bold move from the Maryland Comptroller and places an enormous record-keeping burden on the (admittedly enormous) companies that are subject to the tax. IP addresses are an extremely accurate method for pinpointing user location and digital advertising giants likely maintain server access records sufficient to accurately track user access and file the necessary returns. For CYS readers, the real implications will likely arise in other states that will undoubtedly be watching to see if maintaining records of user IP addresses is a viable apportionment mechanism. There is little question that Google can track data on this scale, but could this apportionment mechanism replace the simple user apportionment affidavit in the future?

New York

The Headline:

Bike-From-Home Enthusiasts Sue Peloton for Improperly Charging Sales Taxes

The Authority:

Brandon Skillern and Ryan Corken v. Peloton Interactive Inc., Case No. 1:21-cv-06808 (Complaint filed in U.S. District Court for Southern District of New York on Aug. 12, 2021).

The Context:

In addition to its ubiquitous bikes, Peloton also sells monthly membership subscriptions to riders who want to take virtual group classes. Messrs. Skillen and Corken purchased bikes for use in Massachusetts, New York, and Virginia along with monthly membership subscriptions  and recently filed a proposed class action alleging that Peloton improperly collected sales tax on these monthly memberships when none of Massachusetts, New York, or Virginia imposed sales tax on digital memberships. The complaint further alleges that Peloton did not remit the collected taxes and instead pocketed the additional revenue. Peloton’s response is due to be filed on October 8, 2021 so this story remains in the developmental stage.

Why It Matters:

It is very important to know which taxes to collect, but it is equally important to know which taxes not to  collect. Furthermore, taxes which may have been improperly collected should generally be remitted to the state to ensure the money is no longer in the seller’s accounts. This case is still in the early stages and may yet settle before the court has an opportunity to issue an opinion, but the lesson is still clear – be sure that tax applies before collecting it from your customer.

West Virginia

The Headline:

West Virginia Announces Streaming Services are Taxable.

The Authority:

– West Virginia State Tax Department TSD-445, Sales and Use Tax for Streaming Services (August 2021)
https://tax.wv.gov/Documents/TSD/tsd445.pdf
– Updated Streamlined Sales and Use Tax Matrix available at: https://sst.streamlinedsalestax.org/TM/Form/4702

The Context:

West Virginia’s Tax Department issued administrative guidance clarifying that streaming services are taxable. This determination came about because the state generally taxes all services unless a specific exemption or exception applies. Noting that no such exemption or exception exists for streaming services, the Department concluded that streaming services are taxable. Importantly, the Department’s guidance indicates that it applies only to streaming services and does not apply to sales of digital products. What is the difference? According to the state, when a consumer purchases streaming services, they generally acquire access to curated entertainment content but does not procure a right to any specific digital product. The original guidance did not provide an effective date on which streaming services should have commenced collecting sales taxes, but the Department subsequently amended its Taxability Matrix under the Streamlined Sales and Use Tax Agreement to indicate that the Department will offer liability relief until October 1st

Why It Matters:

West Virginia’s announcement joins the larger trend of imposing sales and excise taxes on streaming services. As previously reported, Chicago and its northern neighbor Evanston blazed a trail for local excise taxes on video streaming and we are increasingly seeing states access this pandemic-proof revenue stream. Perhaps the most interesting aspect of West Virginia’s announcement is the lack of an effective date – suggesting that streaming services have always been subject to sales taxes and are therefore now open to audit for prior periods. Moving quickly to come into compliance seems a prudent choice in this instance.

Survey from the Department of Reader Feedback

In addition to the usual SALT developments, we have also been keeping an eye on recent federal developments in the cryptocurrency arena. Is this a topic that you would be interested in hearing about in future editions? Please let us know!

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