United States: Above-The-Line Considerations For Your Company

States and localities are continuing to experiment with different above-the-line tax systems, nonuniform methods of taxing similar items and taxes on out-of-state entities that have relationships with in-state contacts. San Francisco has decided to revamp its local tax regime by switching from a payroll to a gross receipts base. More generally, an issue of multistate importance has developed over the taxation of software as a service (SaaS). Finally, states have enacted click-through and affiliate nexus legislation, which has become the most pervasive trend in sales and use taxation over the past several years. Knowledge of these developments will allow multistate businesses to consider potential new filing obligations and adjust their software systems to support compliance.

San Francisco's shift from a payroll tax to a gross receipts tax

While the California corporate income tax garners substantial attention from taxpayers doing business in California, cities in the state, such as Los Angeles and San Francisco, also impose entity-level taxes on businesses. It may be tougher to comply with these local business taxes than you imagine, requiring analysis of numerous variables, including industry classification, payroll size, gross receipts and apportionment rules for in-city and out-of-city activities.

In San Francisco, a change in the way the city measures its entity-level tax on businesses is about to occur. Currently, the San Francisco gross receipts tax (SFGRT), despite its name, is actually based on a taxpayer's payroll, not gross receipts. The SFGRT is imposed on companies doing business in San Francisco whose payrolls exceed $250,000 annually. The SFGRT is computed as 1.5% of the taxable payroll expense, which includes all compensation paid to individuals for services performed in San Francisco. However, effective Jan. 1, 2014, San Francisco will begin a five-year phase-out of the SFGRT in conjunction with a phase-in of the San Francisco business tax (SFBT). The SFBT will be measured by a taxpayer's gross receipts from business activities attributable to San Francisco in excess of $1 million. Businesses with gross receipts in San Francisco for the preceding tax year of $1 million or less will be exempt from the SFBT but subject to higher annual business registration fees. Certain taxpayers will see their San Francisco tax liability substantially change as a result of the shift in tax base from payroll (as required by the SFGRT) to gross receipts (as required by the SFBT). Companies must understand how the SFBT will work to take steps to mitigate potential San Francisco tax increases before the actual shift in the measurement of the city's business tax base from payroll to gross receipts.

Multistate sales tax treatment of SaaS

For revenues from the sales tax to consistently grow from year to year, the sales tax base likely will have to expand from taxing tangible personal property with a selected group of services, to a broader tax base that accounts for newly created products of the digital economy. These include SaaS, cloud computing and technical support activities. The sales tax base has started expanding through new legislation and regulatory or administrative clarifications or case law interpretation of existing legislation. So far, however, the legislation and other SaaS-related guidance released by states has been contradictory and often vague, making it difficult to determine whether SaaS transactions will be taxed in a particular jurisdiction and, if so, how such sales will be sourced.

States are considering the threshold question of whether the sale of SaaS is subject to the sales tax base. States need to determine whether to characterize the sale of SaaS as the sale of a software license, the sale of an information service, the sale of database access or another enumerated item that is classified as either taxable or exempt. In doing so, states often conclude that the sale of SaaS is the sale of tangible personal property, the sale of a service, the sale of an intangible or a mixed transaction. If the transaction is considered to be mixed, states typically follow either a "true object" or "incidental to services" approach. States that follow the true-object test should determine the identity of the true object — the software provided or the data processing involved in the provision of SaaS. This determination will affect whether SaaS is taxable in these jurisdictions. Other states follow an incidental-to-services test that classifies items like SaaS as a taxable or an exempt service, with incidental amounts of tangible personal property being provided. The complex nature of many SaaS arrangements, which often include the provision of additional tangible personal property that may be taxable,makes it wise to require an itemized bill showing taxable and nontaxable components.

If the transaction is considered taxable, the second issue is whether the sale is sourced to that state. Again, guidance is not entirely clear or uniform. States are taking varied approaches, often looking to the location of (i) the seller, (ii) the user of the SaaS or (iii) the server. To the extent states tax SaaS according to where the end customer is using the SaaS, companies will need to be able to accurately track that location. Given that much of this guidance is included in state tax authority letter rulings and other publications that are not regulations, the positions may be narrowly tailored to the taxpayer requesting such guidance. A regulation promulgated later could provide a completely different result on both the taxability and sourcing questions.

Click-through and affiliate nexus

Current law requires remote (out-of-state) sellers to collect and remit sales tax in only the limited number of states where the sellers have created some form of physical presence. Click-through nexus legislation typically establishes nexus or a presumption of nexus when a remote seller pays a commission to an in-state resident for referrals that result in a certain threshold of sales to in-state customers. Affiliate nexus legislation typically establishes nexus or a presumption of nexus when the remote seller's in-state affiliate performs certain activities that benefit the remote seller.

Since 2008, numerous states have followed New York's lead and enacted or implemented click-through nexus rules, including Arkansas, California, Connecticut, Georgia, Illinois, Kansas, Maine (effective Oct. 9, 2013), Minnesota, Missouri (effective Aug. 28, 2013), North Carolina, Pennsylvania, Rhode Island and Vermont. For Vermont, the legislation goes into effect if and when 15 or more other states have enacted similar legislation. The states that have enacted affiliate nexus legislation or implemented affiliate nexus rules are Arkansas, California, Colorado, Georgia, Illinois, Iowa, Kansas, Maine (effective Oct. 9, 2013), Missouri (effective Aug. 28, 2013), New York, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia (effective Sept. 1, 2013) and West Virginia (effective Jan. 1, 2014).

In addition, pending federal legislation deals with the remote seller issue and is designed to impose collection and remittance responsibilities on remote sellers. On May 6, 2013, the U.S. Senate passed the Marketplace Fairness Act of 2013 (MFA), which would allow states to require remote sellers to collect and remit sales and use tax on sales to in-state residents even if the retailer has no physical presence in the state. Under the MFA, a member state of the Streamlined Sales and Use Tax Agreement (SSUTA) could require the collection of tax beginning 180 days after it publishes notice of its intent to exercise its authority (but no earlier than the first day of the calendar quarter that is at least 180 days after the legislation is enacted).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions