EY-sales-and-use-tax-quarterly-october-2014

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petition for cert. granted, Dkt. No. 13-553 (U.S. Sup. Ct. 1 July 2014). Mississippi: A regulation (Miss. Admin. Code §35. IV.7.03(302)) narrowly defining qualified use under the state’s sales and use tax exemption for pollution control equipment was deemed invalid by the Mississippi Supreme Court, because the regulation is inconsistent with the plain language of the exemption statute. Mississippi Dept. of Revenue v. Mississippi Power Company, No. 2013-CA- 01234-SCT (Miss. Sup. Ct. 7 June 2014). Ohio: A parts manufacturer’s purchase of a “caustic” solution that is applied to metal dies after a manufacturing “run” to remove aluminum residue from a stamping press does not qualify for the sales and use manufacturing exemption. Ohio exempts from taxation the purchase of tangible personal property used during the manufacturing process that is necessary for the proper functionality of a manufacturing operation or process, but does not exempt tangible personal property used to repair manufacturing equipment. The Ohio Board of Appeals held that the purchases of caustic solution are subject to tax because the solution is applied after the metal dies were removed, and thus, after the manufacturing process has ceased. Perren v. Testa, No. 2013-614 (Oh. Bd. Tax App. 29 August 2014). Tennessee: Sales of a medical device that is designed for continuous use throughout the day and consists of a portable pack, a wearable component and ancillary items, qualifies for the Tennessee’s sales and use tax exemption as a “prosthetic device for human use and repair services and maintenance of those prosthetic devices.” In order to constitute a “prosthetic device” under Tennessee law it must: (1) be for human use; (2) constitute a replacement, corrective or supportive device; (3) be worn on the body; and (4) be used to artificially replace a missing portion of the body. The Tennessee Department of Revenue (Department) determined that the medical device at issue met these requirements, further explaining that “worn on the body” includes being “carried by the body and does not hinder an individual’s mobility.” “Worn on the body,” however, does not include a device that is placed on an item of mobility that makes the device portable (e.g., a medical item that requires a cart or pole with wheels to move it around). In this case, the Department concluded that the medical device is worn on the body “by virtue of being carried by the patient.” Tenn. Dept. of Rev., Letter Ruling No. 14-02 (18 June 2014). Texas: The Court of Appeals affirmed a lower court’s ruling that an oil and gas operations company failed to meet the burden of proof to establish that equipment it uses to bring petroleum to the ground surface qualifies for the manufacturing exemption from sales and use tax. In order for the exemption to apply, the property at issue must be “used or consumed in the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale.” The court found that the phrase “manufacturing, processing, or fabrication” does not include “extraction.” The Court reasoned that based on the definition of “manufacturing,” which includes each stage of the process, “the extraction of oil and gas from the ground would not seem to qualify as manufacturing.” This determination is “consistent with the legislature’s decision to distinguish the term manufacturing from both mining and extraction in other contexts. ...” Lastly, the Court found the Comptroller of Public Accounts’ interpretation of the manufacturing exemption — that the legislature did not intend for the manufacturing exemption to apply to the extraction of oil and gas — “not plainly erroneous or inconsistent with the language of the statute.” Southwest Royalties, Inc. v. Combs, No. 03-12- 00511-CV (Tex. Ct. App., 3rd Dist., 13 August 2014). Virginia: A sales tax exemption for broadcasting, amplification, transmission and distribution equipment used to provide internet access services may be claimed by an internet service provider (ISP) that exclusively services other businesses and telecommunications companies. The Department of Taxation (Department) has strictly construed the ISP exemption as applicable only to retail ISPs, and not wholesale ISPs. Since the Fairfax County Circuit Court in Cisco Systems, ruled the ISP exemption applied to both retail and wholesale ISPs, the Department held the exemption may apply to the extent the taxpayer’s assets at issue were used for internet services in the locality of Fairfax County, VA, regardless of whether used in retail or wholesale activities. Because the Department has declined to extend the Court’s interpretation in Cisco on a statewide basis, assets used in other localities will not receive the same treatment; rather, the exemption will apply if the equipment or assets are used in a “retail” capacity. Tax must be prorated on property used in both resale and wholesale internet service activities to reflect the percentage of time used in exempt activities. Va. Dept. of Taxn., Commissioner PD No. 14-92 (16 June 2014). Virginia: A company providing waste collection services owes sales tax on all tangible personal property used to provide such services, including residential bins, loading bins, trucks and other equipment, because the company is the user and consumer of such property. Further, the 4 Ernst & Young LLP Sales and Use Tax Quarterly Update
company’s recycling operation does not qualify under the manufacturing or processing exemption because the recycled materials collected do not undergo a process to make them more marketable or useful. Va. Dept. of Taxn., Commissioner PD No. 14-153 (28 August 2014). Transactions Federal: New law extends the Internet Tax Freedom Act (ITFA), which prohibits non-grandfathered states from taxing charges for internet access or imposing new and discriminatory taxes, through 11 December 2014. It is anticipated that Congress will work on a longer extension before adjourning for the year. HJR 124 was signed by President Obama on 19 September 2014. Illinois: An appellate court affirmed a circuit court’s holding that Cook County’s Non-titled Personal Property Use Tax, which is imposed upon the privilege of using in Cook County non-titled personal property purchased outside the County, violates the Illinois Counties Code section 5-1009. Reed Smith LLP v. Ali, 2014 IL App (1st) 132646-U (Ill. App. Ct., 1st Jud. Dist., 4 August 2014). Illinois: A new law provides guidelines for determining the location where retailers are deemed to be engaged in the business of selling tangible personal property for purposes of the Retailers’ Occupation Tax Act, the Use Tax Act, the Service Use Tax Act and the Service Occupation Tax Act, and for the purpose of collecting any other local retailers’ occupation tax administered by the Department of Revenue. These provisions apply to particular selling activities as described by the new section of the law codified at 35 ILCS 120/2-12. The selling location will be deemed the retailer’s place of business where the retailer regularly stocks the tangible personal property or similar items, if the property is purchased: (1) at the retailer’s place of business, provided the customer takes possession or has the property delivered from the retailer’s place of business; or (2) online, via the phone, or in writing, and the customer takes possession of the property at the retailer’s place of business. Further, tangible personal property sold through a vending machine is deemed to be sold where the vending machine is located at the time the sale is made, provided the machine is operated by coin, credit card, coupon or a similar service, allowing the customer to take immediate possession after purchase. Lastly, the sale of coal or other minerals mined in Illinois are deemed to be sold at the location where the minerals are extracted from the earth. These provisions took effect upon becoming law. Ill. Laws 2014, Pub. Act 098-1098 (SB 2612), signed by the governor on 26 August 2014. Michigan: New law (Pub. Act 161) reinstates a 6 percent use tax on medical services provided by Medicaid Health Maintenance Organizations (HMOs) and Prepaid Inpatient Health Plans (PIHPs), effective retroactively to 1 April 2014. The use tax is imposed on the use or consumption of medical services provided to Medicaid beneficiaries, and the services are taxed in the same manner as tangible personal property is taxed. Technology Georgia: The Department of Revenue (DOR) in a letter ruling found that a company’s charges for providing cloud-computing or hosting services are not subject to the state’s sales and use tax because Georgia does not subject such services to sales and use tax. Further, these services do not constitute taxable retail sales because the company’s customers do not receive title to, or receive use or possession or control of, any hardware or software as part of the transaction. The DOR noted that as the end user and consumer, the company is liable for sales and use tax on its purchases of tangible personal property that it uses to provide these services. Ga. Dept. of Rev., LR SUT- 201405 (9 June 2014). New York: Computer software devices primarily used to allow disabled persons to control a computer and its accessories is exempt from New York sales and use taxes because it is deemed a non-taxable prosthetic device. The Department of Taxation and Finance found that the software replaces the disabled person’s motor skills to type or otherwise control a computer button or mouse, is primarily used for that purpose, and is not useful absent the user’s disability. N.Y. Dept. of Taxn. and Fin., TSB-A-14(28)S (20 August 2014). South Carolina: An out-of-state company’s charges for cloud computing service and usage fees associated with such services are not subject to the state’s sales and use taxes because such services do not constitute a taxable communication service as they are unrelated to those “for the manner, method, or instruments for sending a signal of the voice or of messages,” nor do they constitute the sale of taxable tangible personal property. S.C. Dept. of Rev., Private Letter Ruling No. 14-2 (26 August 2014). Wyoming: The Department of Revenue issued guidance on the taxability of sales and services related to computer hardware, software and associated services. Wy. Dept. of Rev., “Computer Sales and Services” (1 August 2014). October 2014 — Issue 4 5
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