Articles Posted in Sales and Use Tax

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(This article originally was published by Law360 on May 17, 2019.)

In the last year, several state legislatures have enacted laws and several state courts have published decisions on whether software as a service, or SaaS, is subject to sales and use tax. These developments impact many SaaS providers, especially due to the expanded nexus provisions that many states are enacting after the United States Supreme Court’s South Dakota v. Wayfair Inc. decision.1 The states have gone in different directions—Indiana enacted legislation exempting SaaS, while Iowa and Rhode Island began taxing SaaS. The Massachusetts Appellate Tax Board and the Pennsylvania Board of Finance and Revenue have both issued decisions clarifying the taxability of SaaS offerings.

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On April 25, 2019, California enacted comprehensive marketplace facilitator legislation. Many said last fall this would be an impossible feat given the divided constituency of the California Legislature on whether all marketplace facilitators should be treated equally for purposes of imposing California’s Sales and Use Tax law. Consider the impossible achieved. California’s sweeping Marketplace Facilitator Act, adopted under Assembly Bill (AB) 147, treats virtually all marketplaces the same.

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The Supreme Court in South Dakota v. Wayfair, Inc. overruled the “physical presence” requirement as “unsound and incorrect” and ruled that “substantial nexus” is satisfied when an out-of-state seller has sufficient “economic and virtual contacts” with the state. The prior Supreme Court precedent in National Bellas Hess, Inc. v. Department of Revenue of Illinois and Quill Corp. v. North Dakota required out-of-state sellers to collect and remit sales/use tax on retail sales of certain tangible personal property and services only if the seller had “physical presence” with the state.

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On April 13, Pillsbury senior counsel Richard Nielsen presents “Sales Taxation of Digital Commerce in the United States” during the the “Digital Economy in the Crosshairs” panel session at the American Bar Association’s 18th Annual Tax Planning Strategies U.S. and Europe Conference.

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(This article originally was published by Law360 on October 10, 2017.)

States historically have had one major impediment to their ability to collect sales tax—the decision in Quill Corporation v. North Dakota to uphold a physical presence test standard for determining nexus.[1] Since the Quill decision, states have applied various approaches to limit or even eliminate Quill’s physical presence nexus standard. These approaches included lobbying Congress to provide federal legislation that would redefine nexus, enacting state “click-through” nexus statutes, and taking aggressive audit positions that limit the applicability of physical presence nexus.

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As consumer products become more high tech, the line between computers and traditional devices has blurred. Even basic products, such as toothbrushes, alarm clocks, doorbells, smartphones, cameras, home security systems, printers and copiers now include technical software that enables new functionality options for the device. As a general principle, tangible personal property, but not intangibles or services, is subject to California Sales and Use Tax. Software “embedded” into a product has value distinct from the value of the rest of the device and that distinct (intangible) value is not subject to sales tax. On the heels of two recent taxpayer victories in the California Court of Appeal relating to taxation of software, this article discusses current developments on how to treat such embedded software for California sales (and use) tax purposes.

(The remainder of this article can be accessed in the January 2017 edition of the Journal of Multistate Taxation and Incentives.)

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On July 1, 2014, the United States Supreme Court agreed to review the 10th Circuit Court of Appeals decision in Direct Marketing Association v. Brohl.1 The Court of Appeals held that federal courts lack jurisdiction under the Tax Injunction Act (TIA) to address Direct Marketing Association’s (DMA) challenge to Colorado’s use tax notice and reporting provisions.

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With the significant rise of third-party enforcement actions—especially consumer class actions and qui tam actions involving state tax questions—corporate taxpayers are being forced to assess a significant set of risks in connection with their compliance obligations.

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On May 30, 2012, the State Board of Equalization (SBE), approved pro-posed amendments to the California Code of Regulations, Title 18, section 1684. The Proposed Regulation attempts to provide guidance as to the meaning of the broadened statutory definition of “retailers engaged in business in this state.” The statutory definition now includes retailers who are members of “commonly controlled groups,” as well as retailers who enter into agreements with “a person or persons in this state” who meet certain minimum thresholds.

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