States Continue Push towards Economic Nexus for Sales and Use Tax
Looking to join Alabama, Louisiana, Oklahoma, South Dakota, and Vermont; 17 states (including Indiana) have introduced legislation in 2017 aimed at enacting economic nexus for out of state sellers.
Economic nexus is the concept that a minimum amount of activity within or with the residents of a state is enough to subject an out-of-state seller to taxation. Quill v North Dakota established that an out-of-state seller would need to have established a physical presence in a state before they would become subject to collecting sales tax. In recent years, states have pushed the boundaries of Quill though affiliate and click-through nexus statutes which can created nexus though third parties that have a physical presence. Beginning with Alabama in 2015, momentum is building, towards taxing all out-of-state sellers (including those making internet sales). The proposed law in Indiana, like several other states, sets a bright-line test of $100,000 of sales or more than 200 separate transactions. Nebraska has set the bar even lower at $25,000 of sales or more than 200 transactions.
Indiana Provides Guidance Relating to Sales Tax of Cloud Computing and Remotely-Accessed Software
The Indiana Department of Revenue recently updated Information Bulletin No. 8 to address sales and use tax issues involving Software as a Service (SaaS), cloud computing, and other matters related to remotely accessed software.
The Indiana Code does not specifically address the taxability of software that can be electronically accessed via the internet without having to download the software to the user’s computer. This includes software that can be accessed either by remote access from a hosted computer or server or through a pool of shared resources from multiple computers and servers (“cloud computing”). Information Bulletin No. 8 now explains that “whether a transaction involving the use of ‘cloud-based’ software is subject to Indiana sales or use tax depends on the facts and circumstances of each transaction, particularly with regards to the amount of control or possession the purchaser is granted in the software, the object of the transaction and the ownership rights, if any, the purchaser has in the software”.
The bulletin explains that charges for accessing pre-written computer software maintained on a third party’s computer or servers are not subject to tax when accessed electronically via the Internet if the software is not transferred to the customer, the customer does not have an ownership interest in the software, and does not control or possess the software or the server.
The bulletin also provides various examples to assist taxpayers in determining whether transactions are subject to sales or use tax.
You can find the entire Information Bulletin No. 8 at http://www.in.gov/dor/reference/files/sib08.pdf.
Are You or Your Business Subject to Ohio Taxes?
- Do you perform services in Indiana that benefit a company or individual in Ohio?
- Do you or your employees actively solicit sales or perform services in Ohio?
- Do you ship tangible personal products to Ohio?
- Do you own or lease property in Ohio?
- Do you have employees that work in Ohio from a home office or on temporary assignments?
- Do you hold a certification of compliance authorizing business in Ohio?
- Do you have a rental activity in Ohio?
- Do you hire Ohio subcontractors to install your products?
- Are you a shareholder or a member of a pass-thru entity that does business in Ohio?
If you answered “yes” to any of the above questions, you may by subject to Ohio’s Commercial Activity Tax (CAT), Ohio’s Pass-Through Entity Tax, and/or an Ohio Municipality Tax. Please see your Somerset advisor, or get in touch with us at email@example.com if you think any of these Ohio taxes may apply to you.
Indiana Auto and Equipment Dealers Sales Tax Update
Indiana auto and equipment dealers had quite a tax scare in December 2016. The Indiana Department of Revenue revised the deduction allowed for a like kind exchange when computing Indiana sales tax liability.
Before December 2016 the market value of the like kind exchange was deducted to compute Indiana sales tax due on the purchase of a new piece of equipment. Effective December 1, 2016 Indiana began only allowing the “equity” to be deducted to compute Indiana sales tax. “Equity” was defined as the market value of the trade less the lien or encumbrance on the trade. Publicity and education to the industry and to the tax practitioner were poor. The guidance was buried in an Indiana Information bulletin that was published over the holidays of 2016. Once this change was brought to the attention of the Auto Dealers Association, the phones for the policy division began to ring and emails were soaring. Tax practitioners, legal counsel and dealership associates began to push back that this change was not in accordance with the Indiana tax code.
Three weeks after the Indiana Department issued that the “Equity” was the only portion to be deducted the Indiana Tax Policy Division has again revised their guidance to revert back to the market value to be deducted to arrive at Indiana gross selling price subject to Indiana sales tax. The Department has publicized that they will not enforce the “equity deduction” method for the three week overlaying period if a dealership has a sales tax audit and was not properly accounting for the lien portion on the trade in.
It has been quite dramatic for the last three weeks for the equipment and auto dealership companies that accept like kind exchanges when purchasing a new model. We believe the guidance is back to the original way of allowing an entire deduction for the market value of the trade.
If you are concerned regarding how your business may have been affected while the rule was being revised over and over, please give your Somerset State and Local Tax professional a call, or get in touch with us at firstname.lastname@example.org.
Colorado Clarifies Composite and Withholding Requirements
The Colorado Department of Revenue recently revised guidelines for taxation of income to nonresident partners and shareholders of pass-through entities. The state requires partnerships and S corporations to ensure their nonresident members pay their share of Colorado income tax on their Colorado-source income. To clarify the requirements, the state issued revised guidelines outlining the three available ways of satisfying this obligation:
- The pass-through entity can, if the nonresident member elects, include the member in a composite return and make a composite payment on the member’s behalf;
- The pass-through entity can file with its Colorado tax return, a signed agreement by the member stating the member agrees to file their own Colorado individual income tax return to report and pay any tax the member owes; or
- The pass-through entity can withhold and remit the tax on the nonresident member’s behalf.
Absent one of the first two elections, the pass-through entity must withhold and remit the tax due.
The above rules apply to nonresident partners and shareholders that are:
- Estates, or
Nonresident members that are themselves partnerships, corporations or residents of any type, are not subject to these guidelines. However, the upper-tier entity may have its own filing requirement.
Caveats to Composite Inclusion
Carryforwards and carrybacks
Certain excess income tax deductions (such as net operating losses) and credits can be either carried forward or carried back; however, no deductions or credits can be carried forward or back on a composite return. Each nonresident member must file their own Colorado income tax return in order to take advantage of these carryovers. As such, in these situations, it may be beneficial to sign the agreement or have withholding on the nonresident partner’s share of income, instead.
Other Colorado-source income
Members should not be included in composite returns if they have other Colorado-source income. Although inclusion in a composite return does satisfy the Colorado filing requirement, any composite tax paid on the member’s behalf cannot be claimed on the member’s separate Colorado income tax return. As such, Colorado does not allow member’s with Colorado-source income from multiple sources to elect inclusion in a composite return.
Please contact your Somerset Tax Advisor, or get in touch with us at email@example.com should you have any questions about your Colorado filing obligations.