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Representative Lamar Smith (Republican, Texas) has introduced a bill to bar multiple taxes on digital goods and services.  Smith had proposed an earlier bill which failed to pass.  This bill is a revised version of the earlier bill. The proposed bill – called the Digital Goods and Services Tax Fairness Act of 2013 – would only allow a state to tax sales of digital goods and services to customers with a tax address within that state. Additionally, states would be barred from imposing multiple taxes on digital goods. The bill defines digital goods as sounds, images, data and facts maintained in digital form. Internet access service is not included as a digital good in the bill. (H.R. 3724)

(01/28/2014)

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)

Charges for the use of canned computer software hosted on a server and accessed electronically by a taxpayer’s customers and employees are subject to Pennsylvania sales and use tax if the end user is located in-state. Computer software is tangible personal property; therefore a charge for electronically accessing the software is taxable. The user is exercising a license to use the software as well as control or power over the software at the user’s location. The taxpayer providing the “cloud computing” service is required to collect sales tax from a customer if the user is located in Pennsylvania. Additionally, software used by the taxpayer’s employees is subject to use tax if the employees are located in Pennsylvania. If the billing address for the software is in Pennsylvania, it is presumed that all users are in Pennsylvania, unless the purchaser provides an exemption certificate stating the percentage of users located outside of Pennsylvania. The charges are not subject to Pennsylvania sales tax if the user is located outside of Pennsylvania, even if the server hosting the software is located in Pennsylvania. The taxpayer can claim a resale exemption on the purchase of software to be located in Pennsylvania if tax will be collected on the use of the software in Pennsylvania. (Legal Letter Ruling No. SUT-12-001, Pennsylvania Department of Revenue, May 31, 2012)

(06/22/2012)

An online travel company (OTC) was not liable for Philadelphia hotel tax on the difference between the room rates it contracted with hotels and the room rates (including fees) it charged its customers because the OTC is not considered an “operator.” The contracts between the OTC and hotels refer to the OTC’s right to facilitate reservations, not to rent rooms. Many of the contracts specifically state that nothing therein constitutes a sale or rental of rooms from the hotel to the OTC. The contracts also state that that hotel is simply making rooms available for booking, the hotel is the lessor, and that the hotel sets all rules and policies for a room rental. The hotels control access to the rooms. The taxable transaction occurs when a customer checks in at the hotel, not when the reservation is booked. The tax ordinance states that a “transaction” is the activity when consideration is paid to the operator. While the OTC charges customers when they book, it is the hotel that ultimately receives consideration for the room. The OTC is a conduit for the payment. The OTC cannot be construed as an operator because an operator receives consideration for, maintains custody of, and engages in transactions for rooms. As such, the OTC is not liable for Philadelphia hotel tax on the transactions. (Philadelphia v. Philadelphia Tax Review Board, Pennsylvania Commonwealth Court, No. 216 C.D. 2011, February 2, 2012)

(05/21/2012)

Pennsylvania Governor Tom Corbett has signed legislation amending the Keystone Opportunity Zone (KOZ), Keystone Opportunity Expansion Zone (KOEZ), and Keystone Opportunity Improvement Zone (KOIZ) Act. Effective immediately, the legislation authorizes the extension of tax exemptions, deductions, abatements, and credits; the creation of additional KOEZs, and; the expansion of existing zones for job creation. The law’s original sunset date of December 31, 2018 is also repealed. Tax benefits available to businesses and residents located in one of the above zones include a sales and use tax exemption, a property tax abatement, and credits against corporate and personal income, capital stock and franchise, insurance gross premiums, bank shares, and mutual thrift institutions taxes. The Pennsylvania Department of Community and Economic Development is authorized to extend the tax exemptions, deductions, abatements, and credits for a parcel in any of the zones set to expire in 2013 for an additional period of 7-10 years from the date of occupancy or from the date of expiration. For zones expiring after 2013, the extension will apply to parcels that are unoccupied on a date determined by the department. The department must receive an application for extension at least three months before the expiration date. The department is authorized to designate up to 15 additional KOEZs. Each zone must be at least 10 but not larger than 350 acres. The KOEZ parcels must be comprised of parcels that are deteriorated, underutilized, or unoccupied, or are occupied by a qualified business that creates or retains at least 1000 full time jobs within three years of the designation, or makes a capital investment of at least $500 million within three years of designation. If a business in a KOEZ invests at least $1 billion and creates at least 400 new permanent full-time jobs in one or more zones within seven years of designation, the department will grant the business and its affiliates exemptions, deductions, abatements, and credits under the act for 15 years from the date of occupancy. That period reverts to 10 years if the business and its affiliates fail to comply. The tax benefits for new zones begin on January 1, 2014 and end on December 31, 2023. The department is authorized to expand one of the above zones to include additional parcels, no larger than 15 acres, that are deteriorated, underutilized, or unoccupied and that are contiguous to an existing zone if the expansion of the existing zones is for job creation or capital investment. All exemptions, deductions, abatements, and credits will be extended to the new parcels of the zone. (Act 2012-16 (S.B. 1237), Laws 2012, effective as noted)

(05/21/2012)

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