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State & Local Tax Update: 9/22/16

Posted 3:26 PM by

State & Local Tax Update



Alabama Issues Contractor Guidance on Government Projects

The Alabama Department of Revenue has issued guidance to contractors, subcontractors, and Alabama governmental entities regarding the reporting requirements of Ala. Code § 40-9-14, which requires the Department to issue Form STC-1 (Sales and Use Tax Certificate of Exemption for Government Entity Projects) to all contractors and subcontractors working on qualifying governmental entity projects. Each contractor and subcontractor who obtains a certificate of exemption for a government entity project is required to electronically file monthly consumers use tax returns through My Alabama Taxes.

Contractors should report their exempt purchases made for each project on the return. The reports must be filed as a prerequisite to renewal of a certificate of exemption. Contractors and subcontractors working on qualifying governmental entity projects who fail to complete the project portion of their Consumers Use Tax Return will be subject to:

  1. Revocation of all certificates of exemption currently issued to the contractor and notification of such revocation to the project owner. Certificates that have been revoked will be reinstated 60 days after the contractor complies with the reporting requirements.
  2. Automatic denial of any future exemption certificates. Contractors not in compliance with reporting requirements will be barred from receiving certificates of exemption on any future projects. Certificates that have been denied due to non-compliance with reporting will be issued 60 days after the contractor complies with the reporting requirements and resubmits a completed application.
  3. Assessment of state and local taxes on all purchases made with the certificate of exemption.
  4. Civil penalties which are the greater of $2,000 or two times any state and local taxes found due. 

See Tax Guidance Notice for more information.   

Ohio to Exempt Digital Advertising Services

Recently passed legislation exempts from sales and use tax sales of digital advertising services, including electronically delivered promotional advertising to potential customers. "Digital advertising services" means providing access, by means of telecommunications equipment, to computer equipment that is used to enter, upload, download, review, manipulate, store, add, or delete data for the purpose of electronically displaying, delivering, placing, or transferring promotional advertisements to potential customers about products or services, or about industry or business brands.

It is effective on the first day of the month that begins at least 30 days after the 91st day upon filing with the Secretary of State (possibly Dec. 1, 2016). See HB 466 for more information. 

Pennsylvania Authorizes Local Payroll Tax

Governor Tom Wolf has signed legislation authorizing a school district in which a financially distressed municipality is located to impose a local payroll tax, and providing new tax credits for businesses that contribute to scholarship, educational improvement or opportunity scholarship organizations. See HB 1606 for more information.

South Carolina Issues Income Tax Nexus Guidance

The South Carolina Department of Revenue (DOR) has issued a revenue ruling that gives guidance concerning nexus creating activities for income tax purposes. The revenue ruling supersedes Revenue Ruling 03-04 and clarifies the minimum connection or contact between a taxpayer and South Carolina sufficient to subject the taxpayer to the taxing jurisdiction of the state.

The revenue ruling discusses the following categories of activities:

  • General activities
  • Registration with state agencies and departments
  • Ownership/leasing of property in-state
  • Ownership interest of in-state pass-through entities
  • Licensing intangibles
  • Sales-related employee activities
  • Nonsales-related employee activities
  • Activities of unrelated parties
  • Distribution and delivery
  • Financial activities and transactions
  • Transactions with South Carolina printers
  • Computer and Internet based transactions

In all of the categories, the revenue ruling presumes that the activity is not de minimis. The DOR notes that a combination of several different de minimis activities or relationships, even if each, by itself, does not create nexus, may create nexus with South Carolina. See Revenue Ruling 16-11 for more information. 

Texas Issues Guidance on Flow-Through Funds Exclusions for Franchise Tax

The Texas Comptroller of Public Accounts has issued a revised policy ruling regarding payments eligible for exclusion from total revenue and qualifying activities for the cost of goods sold (COGS) deduction for Texas franchise tax purposes. A payment is mandated by contract to be distributed to other entities and qualifies as excludible flow-through funds if the taxable entity has a contract with its customer, providing that a subcontractor may be used and requiring payment to the subcontractor, or by a written contract between the taxable entity and the subcontractor where the payment is based on the funds paid to the taxable entity by the taxable entity's customers (i.e., the contract between the taxable entity and the subcontractor require payment based on a percentage of the funds the taxable entity receives from its customer).

The timing of the payments does not determine if a payment qualifies as a flow-through fund. Further, payments that qualify as flow-through funds and have a reasonable nexus to the actual or proposed design, construction, remodeling, or repair of improvements on real property or the location of boundaries of real property, may be excluded from revenue. With regard to COGS, the interpretation of what is considered to be furnishing labor or materials to a project for the construction, improvement, remodeling, repair, or industrial maintenance of real property is expanded and will no longer require an entity to actually physically touch the property or make a change to the property to qualify for the COGS deduction.

However, costs considered too far removed from the construction, improvement, remodeling, repair, or industrial maintenance of real property do not qualify for either an exclusion from revenue or a COGS deduction. See Revenue Ruling 201606856L for more information. 

Texas Issues PLR on Web Security Services

The Texas Comptroller of Public Accounts has also issued a private letter ruling that provides guidance on the sales taxability of web security services. The taxpayer is an Arizona LLC that provides customers, usually businesses, with SSL Certificates for a lump-sum subscription charge that must be renewed periodically. The taxpayer authenticates the customer's identity, issues a digital certificate to the customer that contains no computer code or software (i.e., contains only data in plain text relating to the certificate expiration date, the certificate owner's name, the name of the issuer, the serial number of the certificate, and the issuer's electronic signature), and verifies the digital certificate when an end user's Web browser communicates with the taxpayer's server upon connecting to the customer's website.

The digital certificate is not taxable in Texas because it is not a “computer program” that provides a series of instructions that are coded for acceptance or use by a computer system and that are designed to permit the computer system to process data and provide results and information. The authentication and resolution services are not taxable in Texas because they are not data processing services (i.e., no compiling, producing, maintaining, entering, or retrieving of information), information services (i.e., no furnishing of general or specialized news or other current information), or telecommunication services (i.e., no electronic or electrical transmission, conveyance, routing, or reception of sounds, signals, data, or information). See PLR 201608960L for more information. 

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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