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Application software accessed over the Internet or through wireless media is not subject to Idaho sales and use tax because it is excluded from the definition of tangible personal property.  "Application software accessed over the Internet or through wireless media" means the right to use computer software accessed over the Internet or through wireless media from a location owned or maintained by a seller or its agent and not loaded and left at the user's location. Remotely accessed computer software is not exempt if the primary purpose of the software is for entertainment use or if the vendor of the software sells the same or comparable software in a storage media or by electronic download, either directly or through wholesale or retail channels. The pertinent bill’s statement of purpose notes that in today's economy, services are typically provided to users by vendors using software offered over the Internet, or in the "cloud." Application software developed by the service provider is owned or controlled by that provider, and the user is given limited access rights and no ability to modify or transfer the software.  The use of this type of software does not involve a "transfer" in the traditional sense, is economically equivalent to a service, and is not subject to tax.  (Ch. 271 (H.B. 243), Laws 2013, effective April 3, 2013; Statement of Purpose/Fiscal Note, Idaho House of Representatives)

(04/29/2013)

The federal Marketplace Fairness Act of 2013 was introduced in the House of Representatives and the Senate on February 14, 2013.  If passed, the bill would authorize states that meet certain requirements to require remote sellers that do not meet a "small seller exception" to collect their state and local sales and use taxes.  Under the legislation, a state would be authorized to require a remote seller to collect sales and use taxes only if the remote seller has gross annual receipts in total remote sales in the United States of more than $1 million in the preceding calendar year.

 

Member states of the Streamlined Sales and Use Tax (SST) Agreement would be authorized to require all sellers that do not qualify for the small seller exception to collect and remit sales and use taxes with respect to remote sales sourced to that member state pursuant to the provisions of the SST Agreement. The SST Agreement would have to include certain minimum simplification requirements. An SST member state could begin to exercise authority under the Act beginning 90 days after the state publishes notice of its intent to exercise such authority, but no earlier than the first day of the calendar quarter that is at least 90 days after the date of the enactment of the Act.

 

States that are not members of the SST Agreement would be authorized, notwithstanding any other provision of law, to require all sellers that do not qualify for the small seller exception to collect and remit sales and use taxes with respect to remote sales sourced to the state if the state implements certain minimum simplification requirements. The authority would begin no earlier than the first day of the calendar quarter that is at least six months after the state enacts legislation to exercise the authority granted by the Act.

 

To enforce collection requirements on remote sellers that do not meet the small seller exception, states that are not members of the SST Agreement would have to implement the minimum simplification requirements listed below. For SST member states to have collection authority, the requirements would have to be included in the SST Agreement.

 

-       A single entity within the state responsible for all state and local sales and use tax administration, return processing, and audits for remote sales sourced to the state

-       A single audit of a remote seller for all state and local taxing jurisdictions within that state

-       A single sales and use tax return to be used by remote sellers to be filed with the single entity responsible for tax administration.

-       Each state would have to provide a uniform sales and use tax base among the state and the local taxing jurisdictions within the state.

-       Each state would have to source all interstate sales in compliance with the sourcing definition outlined below.

-       Each state would have to provide information indicating the taxability of products and services along with any product and service exemptions from sales and use tax in the state and a rates and boundary database. States would have to provide free software for remote sellers that calculates sales and use taxes due on each transaction at the time the transaction is completed, that files sales and use tax returns, and that is updated to reflect state and local rate changes. States would also have to provide certification procedures for persons to be approved as certified software providers (CSPs). Such CSPs would have to be capable of calculating and filing sales and use taxes in all the states qualified under the Act.

-       Each state would have to relieve remote sellers from liability to the state or locality for incorrect collection, remittance, or noncollection of sales and use taxes, including any penalties or interest, if the liability is the result of an error or omission made by a CSP.

-       Each state would have to relieve CSPs from liability to the state or locality for the incorrect collection, remittance, or noncollection of sales and use taxes, including any penalties or interest, if the liability is the result of misleading or inaccurate information provided by a remote seller.

-       Each state would have to relieve remote sellers and CSPs from liability to the state or locality for incorrect collection, remittance, or noncollection of sales and use taxes, including any penalties or interest, if the liability is the result of incorrect information or software provided by the state.

-       Each state would have to provide remote sellers and CSPs with 90 days’ notice of a rate change by the state or any locality in the state and update the taxability and exemption information and rate and boundary databases, and would have to relieve any remote seller or CSP from liability for collecting sales and use taxes at the immediately preceding effective rate during the 90-day notice period if the required notice is not provided.

 

For non-SST member states, the location to which a remote sale is sourced would be the location where the item sold is received by the purchaser, based on the location indicated by instructions for delivery. When no delivery location is specified, the remote sale is sourced to the customer's address that is either known to the seller or, if not known, obtained by the seller during the transaction, including the address of the customer's payment instrument if no other address is available. If an address is unknown and a billing address cannot be obtained, the remote sale is sourced to the address of the seller from which the remote sale was made. SST member states would be required to comply with the sourcing provisions of the SST Agreement.

 

On March 22, 2013, the U.S. Senate voted 75-to-24 in favor of the concept of the Marketplace Fairness Act. The actual Marketplace Fairness Act was introduced in both chambers in February, but last week Senator Enzi, the sponsor of the Senate bill, offered an amendment to the 2014 Budget Resolution that would include insertion of the language of Marketplace Fairness in the budget. It was a largely symbolic tactic since the Budget Resolution itself will not become law, but by approving the amendment, the Senate has shown that there is broad, bipartisan support for the notion of requiring remote sellers to collect sales tax.

 

On May 6, 2013, the U.S. Senate passed the Marketplace Fairness Act with a 69-27 vote.

 

UPDATE: On September 18, 2013, Rep. Bob Goodlatte, the chairman of the House Judiciary Committee released a set of seven principles that he believes any internet sales tax bill should meet.  The seven principles outlined by Goodlatte are tax relief, tech neutrality, no regulation without representation, simplicity, tax competition, states’ rights, and privacy rights.  For more details on the principles, click here to see the House Judiciary Committee’s press release.

 

We are continuing to track the activities of these bills.  We are also involved in planning efforts involving states and businesses regarding the potential implementation consequences of passage.  Watch for updates in the Sales Tax Compass as well as through our Twitter account and LinkedIn updates. 

 

The text of the bill passed by the Senate can be viewed here.

 

For an update on this news item, visit Senate Introduces Marketplace Fairness Act of 2015.

 

(H.R. 684 and S. 336, as introduced in Congress on February 14, 2013; S.743, as passed by the U.S. Senate on May 6, 2013)

(09/20/2013)

Effective October 1, 2008, the Tax Commission will no longer allow contractors to substitute sales tax charged to the customer on improvements to real property for the tax owed on the purchase of building materials. Since jobs such as laying carpet, installing windows, doors, wallboard, built-in appliances and furnaces are not retail sales of goods, the contractor should not charge sales tax to its customers or purchase materials tax exempt. Instead, the contractor should pay sales or use tax when it purchases materials, and charge customers a total price that includes all costs of doing business, including sales tax paid. (News, Idaho State Tax Commission, June 2008)

(07/02/2008)

Effective July 1, 2008, Idaho HB 561 amends existing law to provide that the production exemption from sales and use tax shall be available to a business or separately operated segment of a business engaged in the business of processing materials, substances or commodities for use as fuel for the production of energy. The exemption is available regardless of 1) business type, 2) ownership of the materials being processed, or 3) ultimate sale within or outside of Idaho. (2008 ID H.B. 561, Effective July 1, 2008)

(03/31/2008)

This legislation amends section 63-3611 of the Idaho Code to provide that a “retailer engaged in business in this state” be defined as any retailer with substantial nexus in this state, and creates a new section 63-3615A of the Idaho Code. A retailer has “substantial nexus” with Idaho if both of the following apply: (1) the retailer and an in-state business maintaining one or more locations within Idaho are related parties; and (2) the retailer and the in-state business use an identical or substantially similar name, trade name, trademark, or goodwill to develop, promote, or maintain sales, or the in-state business provides services to, or that inure to the benefit of, the out-of-state business related to developing, promoting, or maintaining the in-state market.

In Summary, the amendment provides that a retailer engaged in business in this state be defined as any retailer with substantial nexus in this state; provides that any retailer having a franchisee or license operating under its trade name or owned by the same entity or corporation in the State of Idaho be required to collect sales and use taxes from its customers. If two entities are related parties, a determination by applying several tests that incorporate provisions from the Internal Revenue Code. (IRC 63-3004). Also, the above provisions do not apply to a retailer that had less than $100,000 in sales in Idaho in the previous year. (2008 ID H 360, Enacted, March 3, 2008).

(03/31/2008)

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