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State & Local Tax Update: 7/17/17

Posted 3:42 PM by



Indiana Sales Tax Applies to Texting Service and Printer Rental Fees

A company's sales of a cloud-based mobile messaging service is a “telecommunication service” subject to sales and use tax. In Indiana, a sales tax is imposed on products transferred electronically only if the products meet the definition of specified digital products, pre-written computer software, or telecommunication services.

“Telecommunication service” is defined as the electronic transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals to a point, or between or among points." In this instance, the company plans to provide its customers with a mobile messaging service, and if customers need to print the text messages, the company provides a printer for this purpose and charges the customer for a separately stated “usage fee.”

The Indiana Department of Revenue concluded that because the company's mobile messaging service is a telecommunication service, and the telecommunication service is intrastate, it is a retail transaction subject to sales and use tax. Further, the printer usage fee it intends to charge customers for providing them with a printer is a charge for renting tangible personal property and is therefore subject to sales and use tax. For more information, see Indiana Revenue Ruling No. ST 15-08.   

Indiana Sales Tax Not Applicable to Software Interfaces

A diagnostic medical testing company's purchases of third-party interfaces – which it hires third parties to develop so that its proprietary software suite can communicate with various medical facilities' software systems – are a service and not subject to sales and use tax. In Indiana, except for certain enumerated services, sales of services generally are not retail transactions and are not subject to sales or use tax. In this case, the taxpayer purchases interface services from third parties to facilitate the connectivity and communication between its cloud-based proprietary software, and various medical organizations' systems, in order to allow the two conflicting systems to accurately exchange data. The third parties create interface software for the purpose of mapping and translating information between the conflicting systems.

Since the taxpayer was able to provide evidence that: it does not acquire the interface software for its own independent use; it is not granted any right to use, control, or access the software; the software provides translating services between various software platforms; and the interface software is used as an incident to the service provided, the Indiana Department of Revenue concluded that the fee for the interface software is exempt. For more information, see Indiana Revenue Ruling No. ST 15-07.   

Tennessee to Phase Out Hall Income Tax

The recently passed IMPROVE Act reduces the Hall income tax rate by one percent each tax year through the year beginning Jan. 1, 2020. The rates will be four percent for tax years beginning Jan. 1, 2017, and prior to Jan. 1, 2018; three percent for tax years beginning Jan. 1, 2018, and prior to Jan. 1, 2019; two percent for tax years beginning Jan. 1, 2019, and prior to Jan. 1, 2020; and one percent for tax years beginning Jan. 1, 2020, and prior to Jan. 1, 2021.

The Hall income tax is fully repealed for tax years beginning on or after Jan. 1, 2021. For more information, see TN Important Notice 17-09 5/1/17.

Texas Franchise Tax Ruling on COGS Deduction Eligibility for Software Development

The Texas Comptroller of Public Accounts has ruled that an information technology consulting company, which provides software products and consulting services, was not entitled to a cost of goods sold deduction on software it developed, and it cannot exclude payments made to subcontractors from total revenue. In Texas, the cost of tangible personal property – including computer programs but not intangible property or services – sold in the ordinary course of business can be subtracted in determining Texas taxable margin.

In this case, the company did not own the software that it developed for customers. Also, in Texas, in calculating taxable margin for franchise tax purposes, flow-through amounts that are mandated by law or fiduciary duty are excluded from total revenue. In this case, the payments to subcontractors were not related to the design, construction, or repair of real property but to computer programs. See Texas Comptroller's Decision No. 111,107 for more information. 

Washington Denied Appeal of B&O Tax Due to Physical Presence

A seller of dietary supplements and health foods sought a refund of taxes paid, arguing that it did not have nexus with Washington. Despite having four employees located in Washington, the taxpayer argued that the value of property, such as computers and employees located within the state, were not material to the taxpayer's overall operations and, therefore, did not create substantial nexus with the state of Washington. The taxpayer also claimed that it did not benefit from the services provided by the state of Washington related to the tax.

The Appeals Division noted that sellers of personal property that are physically present in the state are deemed to have nexus in the state. The presence of the taxpayer's employees was sufficient to establish physical presence. Because the taxpayer's physical presence in Washington was not in dispute, the taxpayer's arguments regarding the contribution of the Washington employees to the business' operations were immaterial. The taxpayer's other argument was rejected because a tax does not have to be limited to the cost of services incurred by the state with regard to a particular activity. For more information, see Washington Tax Determination No. 15-0302

Wisconsin Updates Guidance for Electrical Contractors

The Wisconsin Department of Revenue has updated its publication explaining how sales and use taxes affect electrical contractors. The publication was revised to reflect the following exemptions. Effective for contracts entered into on and after Oct. 1, 2013, 2013 Wisconsin Act 20 created an exemption for a contractor's sale of taxable products sold in a lump sum contract for real property construction if the selling price of the taxable products is less than 10 percent of the total contract price. The contractor is deemed the consumer of the taxable products sold, unless sold to an exempt entity. Effective Aug. 14, 2015, 2015 Wisconsin Act 60 created a sales and use tax exemption for building materials, supplies, equipment, and landscaping services purchased by owners, lessees, contractors, subcontractors, or builders if that property or service is acquired solely for, or used solely in, the construction or development of qualified sports and entertainment arena facilities.

An exemption was created in 2015 Wisconsin Act 126 for building materials sold to a construction contractor who, in fulfillment of a real property construction activity, transfers the materials to cities/towns, hospitals, sewerage commissions, local water authorities, or not-for-profit, if the materials becomes a component of a facility in Wisconsin that is owned by the entity. This exemption applies to contracts entered into on or after Jan. 1, 2016. Information has been added regarding the tax treatment of purchases by contractors of construction project information such as new construction projects available for the contractor to bid on and project plans and specifications where the contractor accesses or obtains this information electronically.

Finally, a chart has been added that summarizes the Wisconsin sales and use tax treatment for the sales, installation, and maintenance and repair of security and burglar and fire alarm systems. For more information, see Wisconsin Dept. Rev. Tax Publication No. 200.

About the Author
Donna Niesen is a partner in Katz, Sapper & Miller’s State and Local Tax Group. Donna helps keep clients up-to-date on the multitude of tax rules and requirements in all 50 states. She guides them in the right direction as they address the complex issues that emerge on both the state and local levels. Connect with her on LinkedIn.

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