State and Local Tax Outlook for 2011

  • States will continue to have budget problems. How will they make up for shortfalls? They are likely to raise taxes, expand the tax base and/or increase enforcement efforts.
  • Amnesty programs will gain popularity.
  • California, New York and Rhode Island are expected to enact some type of tax reform.
  • An increasing number of states will move away from “cost of performance sourcing” to "market based sourcing" for apportioning service-related income.
  • States will continue to decouple from Federal taxpayer favorable legislation.
  • States will continue to move towards imposing sales and use tax on digital goods and software as a service (SaaS) – but will they address it in their legislature?
  • Due to FIN 48 requirements and increased audit activity at the state level, taxpayers should consider Voluntary Disclosure Agreements to limit the look-back period and benefit from penalty (and potentially interest) relief.
  • More states will consider adopting economic nexus standards.
  • Consolidated and combined income tax reporting requirements will continue to increase.

Other State and Local Tax Updates from the Sales Tax Institute

Electronically Delivered Products and Remotely Accessed Software, Materials, and Media Taxable in Louisiana

In a recent revenue ruling, Louisiana stated that all products delivered electronically to equipment located within the State, including computer software and applications, stored media, and entertainment media and products are considered tangible personal property, and are therefore subject to sales, use, or lease tax. Similarly, remotely accessed software, information materials, and entertainment products or media are taxable transactions when the access requires payment or consideration in any form. This applies whether accessed one-time or as part of a subscription, and regardless of if the item can be only be viewed or if it is downloaded. Further, any consideration paid for electronic receipt or access to data, materials, media, information, or other form of communication that is converted to readable, usable, or viewable form by software or browsers installed on hardware located in Louisiana is also subject to sales, use or lease tax. (Revenue Ruling No. 10-001, Louisiana Department of Revenue, March 23, 2010)

(4/15/10)

North Carolina Provides Guidance Regarding Taxability of Computer Software

The North Carolina Department of Revenue has issued a notice discussing enacted legislation concerning the taxability of computer software. Effective January 1 ,2010, the sale at retail and the use, storage, or consumption of computer software that meets the following requirements is exempt from tax: (1) software that is designed to run on an enterprise server operating system; (2) software that is sold to a person who operates a datacenter and is used within the datacenter; (3) software that is sold to a person who provides cable service, telecommunications service, or video programming and is used to provide ancillary service, cable service, Internet access service, telecommunications service, or video programming. Prior to January 1, 2010, computer software delivered electronically or by load and leave was exempt from sales and use tax. Also effective January 1, 2010, computer software or digital property that becomes a component part of other computer software of digital property that is offered for sale or of a service that is offered for sale is exempt. Custom computer software and the portion of prewritten computer software that is modified or enhanced if the modification or enhancement is designed and developed to the specifications of a specific purchaser and the charges for the modification or enhancement are separately stated continue to be exempt. Prewritten computer software or licenses purchased by consumers for personal use are taxable (Important Notice: Computer Software, North Carolina Department of Revenue, February 2010).

(4/5/10)

Colorado Issues Emergency Regulation Explaining Taxation of Multiple Points of Use Software

In response to Colorado’s recent elimination of the exemption for electronically-delivered software, an emergency regulation has been issued that explains, among other things, the taxation of standardized software that is concurrently available for use in multiple jurisdictions. If the purchaser knows at the time of purchase the software is Multiple Point of Use (MPU) Software, he or she should present the seller with a MPU Exemption Certificate. Upon receiving the MPU Exemption Certificate, the seller is relieved of all obligations to collect, pay, or remit tax, and the burden is on the purchaser to apportion, pay and remit the tax and submit a copy of the certificate to the Colorado DOR.

The purchaser can use any reasonable, consistent, uniform method of apportionment, as long as it is supportable by business records. The apportionment should be based on the total purchase price paid by the purchaser; individual licenses may not be apportioned to specific jurisdictions. The MPU Exemption Certificate is not valid for software that is received at the seller’s business location or software that is loaded onto computer hardware prior to sale. (Emergency Reg. 39-26-102.13, Colorado DOR, effective March 2, 2010)

(4/22/10)