Articles Posted in Sales and Use Tax

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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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California Sales and Use Tax Regulation 1698.5, which sets forth comprehensive procedures for sales and use tax audits, has been approved by the California Office of Administrative Law. The new regulation, which was proposed by the California Board of Equalization (BOE), goes into effect August 18, 2010. According to the BOE, the regulation was necessary to clearly establish taxpayers’ and BOE staff’s responsibilities and duties during the audit process in order to ensure that BOE staff completes audits in a timely and efficient manner and to help taxpayers better understand and avoid confusion regarding the BOE audit process.

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For purposes of the California sales and use tax law, a “sale” and “purchase” do not include the design, development, writing, translation, fabrication, lease or transfer for a consideration of title or possession of a custom computer program. An issue that often arises with respect to a custom computer program is whether such program is deemed a performance of service, versus a sale or purchase of tangible personal property. In addition, it is often difficult to determine how much “customization” is necessary to constitute a custom computer program.

(The remainder of this article can be accessed in the June 2006 edition of Lexis California Tax Practice Insights.)

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Pursuant to Cal. Rev. & Tax. Code Section 19306(a) a claim for refund typically must be filed within for years from the date the return was filed, four years from the last day prescribed for filing the return (determined without regard to any extension of time for filing the return), or one year from the date of the overpayment, whichever expired later. If six months elapses without any action upon a filed refund claim, the taxpayer generally may consider the claim disallowed or “deemed denied” and either appeal the claim to the State Board of Equalization (SBE) or file a suit for refund in court.

(The remainder of this article can be accessed in the June 2006 edition of Lexis California Tax Practice Insights.)

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Taxpayers intending to change their residency for California personal income tax purposes should be aware that intent alone is insufficient to establish new residency. Moreover, intent coupled with physical acts of starting to move or transition to another state is also insufficient to establish new residency. The California courts have held if one is a resident of California, that person cannot be in California for “a temporary or transitory purpose” until that person’s acts as well as his or her intent show that he or she has moved out of California. That one may intend to move from California at some time in the future does not make that person someone who is in California for a temporary or transitory purpose. One is a resident for tax purposes until there are sufficient indicia of an actual change of such residence.

(The remainder of this article can be accessed in the June 2006 edition of Lexis California Tax Practice Insights.)

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