As states struggle to find ways to replace declining revenue caused by a slower-than-expected economic recovery, evolving technology has proven to be both a blessing and a curse. It has made it easier for taxpayers -- and states -- to collect or pay tax based on sales in more than 10,000 sales tax jurisdictions, while generating sales tax issues such as click-through nexus and software sales that weren't even thought of prior to the advent of the Internet.

"The overarching issues continue to be click-through and affiliate nexus and the state passing of Amazon laws," said Carol Koskinis-Graves, senior state tax analyst on sales and use taxes for Wolters Kluwer, CCH. "Each state has nexus issues that come up, with separate sets of cases and rulings of particular significance in certain states. Individual states have their own issues, but the major issue that involves all the states is the nexus issue and the taxation of remote sales."

"There's always some movement on this issue as far as laws that are amending existing provisions or are brand-new provisions. Five years ago, California, New York and North Carolina addressed the issue. Now, states that don't address the taxation of remote sales are the exception," she said. "States started enacting click-through and affiliate nexus, or Amazon laws. At first, Amazon fought the efforts, but now Amazon is in favor of the Marketplace Fairness Act, which would authorize states to require the collection and remittance of tax by remote sellers."

If the Marketplace Fairness Act is passed this year, it will likely happen at the end of the year, Koskinis-Graves indicated. "It would be a huge step -- there wouldn't be any need to enact Amazon laws if it were passed," she said. "And the Supreme Court has said it will not address this issue, so it wouldn't be open to being overturned."

A trending issue in a number of states is the taxation of cannabis, Koskinis-Graves noted. "We don't report on whether it is legalized for medical or recreational purposes, but once it is legalized then we report on whether that state chooses to impose a tax on it," she said. "Some states impose different fees and taxes, including a sales and use tax, and an excise tax. If cannabis is illegal, many states impose a stamp tax. For example, if a person is charged criminally with selling illegal cannabis, at the conclusion of the proceedings the state may charge a stamp tax on the illegal sale."



The expansion of nexus continues to be an incredibly important area for practitioners, agreed Rebecca Newton-Clarke, senior editor of state and local tax for Thomson Reuters: "In the last month alone, New Jersey has adopted an aggressive click-through nexus law with the extremely low sales threshold of $10,000 for the proceeding four quarters, and Colorado has adopted aggressive affiliate nexus provisions."

E-commerce remains a crucial developing area and one that is rife with pitfalls for the unwary practitioner, Newton-Clarke observed. "States' treatment of cloud computing and other electronic transactions varies broadly, and while some states have complicated rules for these transactions, others have yet to offer any guidance at all," she said. "This leaves businesses and other taxpayers in a quandary as to their obligations. For example, Vermont taxes cloud computing transactions, while New York taxes only cloud computing transactions that involve remote access to software. New Jersey does not tax cloud computing per se, although the state's tax on information services overlaps with and consequently applies to some cloud computing transactions. Connecticut taxes cloud computing transactions at a special lower rate. California, one of the more aggressive states in other sales and use tax arenas, does not tax cloud computing transactions at all."

Virtual currency is an emerging issue, according to Newton-Clarke. "States are only beginning to address the basis issues surrounding Bitcoin and other virtual currency," she said. "California has ruled that the tax generally applies to the retailer's advertised selling price in U.S. dollars when a retailer enters into a contract to accept payment in virtual currency. More recently, Kentucky ruled that the seller must maintain documentation of the value of the Bitcoin at the time the transaction occurs."

Peter Stathopoulos, lead partner in the state and local tax practice at Atlanta-based Bennett Thrasher, sees an increasing gap between sales and use tax statutes and technology, specifically the move to cloud computing and Software-as-a-Service.

"The issue is that traditional sales and use tax statutes were created in the 1930s, 1940s and 1950s," he said. "They were designed to deal with sales of tangible personal property. In the late 1980s and early 1990s, when most software was transmitted by floppy discs, states adopted the convention of treating software as tangible personal property. Technology has moved on since then. Most states now say they impose a sales tax on either the sale or license of prewritten software regardless of how it's delivered."

But today, most of the time a user is not even downloading software onto a computer, he said. "If I access software online and it's never on my computer, is that a taxable transaction? If I sign a subscription agreement and get access to a password to log on to the Internet, did a sale or license of personal property ever take place? More and more states take the position that it is a taxable license," he said. "Taxpayers are pushing back and saying, 'No, it's not a license, you need to have control and possession for that. What it really is, is a service.' Most states do not impose a sales tax on a service. More and more are attempting to tax cloud-based software, but they don't necessarily have a legal basis to do so."

Stathopoulos is skeptical that the Marketplace Fairness Act will pass the House. "Initially, it had a lot of momentum because proponents had convinced enough Republicans that it is not a new tax, but the consensus may be shifting the other way," he said. "A significant number of people think it would be an expansion of states' taxing powers."

Dan Megathlin, a partner at Crowe Horwath LLP, agreed. "It's dead for now -- it's last year's story," he said. "The one thing that continues to evolve is states continuing to expand their net on taxing services, particularly all the services that surround software. More states are jumping in and doing 180s where they might have suggested it was not taxable in the past."

"The tax scheme in most states suggests that the sales tax is imposed on sales of tangible personal property and specific services," he said. "When it became commonplace to deliver software electronically, half the states said the sales were subject to tax, the other half said it wasn't subject to tax anymore because no tangible personal property was involved. Now that software resides on the cloud where nothing changes hands, the states that elected to tax the sale of software still continue to tax it. They're getting even further out from the statutory authority that would allow them to do it. For those states that only have the authority to tax tangible personal property, it's a stretch, but not withstanding a lot still tax it and a lot of it is being litigated."

"Some states are pushing their legislatures to enumerate a service that they can tax," he said. "The other way is that states like Texas and Ohio will tax a couple of enumerated services such as data processing or information services, and then suggest the interpretation of these services is broad enough to cover SaaS."



Most businesses of any size need software to assist them in charging, collecting and paying sales tax, according to Cory Barwick, technical product manager for Wolters Kluwer CCH. "Most activity is in the e-commerce area," he said. "Those businesses are doing transactions in potentially thousands of jurisdictions. If you have nexus with five to 10 states, you're a good candidate for a 'bolt-on' tax engine. A bolt-on engine is a piece of software that takes over the sales tax function from the native accounting package," Barwick explained. "There are currently 10,000 taxing jurisdictions, so if someone is doing something through Amazon Fulfillment, they have the potential to reach all of those."

A good example of the ambiguity in sales tax is in prepared food, he said. "If you make yourself a salad in a grocery store in California and take it out of the store, it's generally deemed to be nontaxable," he said. "But if you sit and consume it in the store, it's taxable."

Regarding the Marketplace Fairness Act, Barwick said, "If it were to pass, it would do away with the physical presence requirement to collect tax and it would basically institute a 'wherever you make a sale you have to collect tax' law. It would be a boon for the software industry because there would be a tremendous chunk of taxpayers that would need some type of tax engine outside of their native accounting package."

Scott Peterson, director of government affairs at Avalara and former executive director of the Streamlined Sales Tax Project, highlighted two current trends in the sales tax arena. Peterson sees nexus as a wedge that can make collection of sales tax on remote sales an issue for Congress to address. "A majority of states are counting on Congress to address the issue," he said. "Asking the Supreme Court to take on the issue is a poor bet. It's easier to apply pressure on Congress."

The other issue is the effort by states to eliminate or reduce their reliance on corporate income taxes and increase reliance on sales taxes as a means to generate revenue, he suggested: "A lot of Republican governors just don't believe that taxing income is the way the state should fund its services. They have a philosophical bent on taxing consumption instead of income."

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