California Raises Sales Tax Rate

To help bridge the gap between revenue and spending, California is increasing the state sales tax rate from 5% to 6% effective April 1, 2009. This is a temporary tax increase for the next two years.  We will see just how "temporary" this tax is in a couple of years.

The legislature decided not to extent the sales tax to services which would seem to be a logical way to move.  California continues to remain one of the few states that does not impose state sales tax any type of telecommunications service. 

As I've been predicting for over a year, states are going to be taking some aggressive moves on the tax front to bridge the financial gap that exists in almost every state. 

What are you seeing or hearing in your state?

 

Watch out for New York Taxation of ASP and SAAS Arrangements

During the past few months, the New York Department of Taxation and Finance has issued two very interesting Advisory Opinions. The first was issued November 11, 2008 (TSB-A-08(62)S) and the second was on January 21, 2009 (TSB-A-09(2)S).

The November TSB held that software accessed through an application services provider (ASP) or a software as a services (SAAS) Agreement were taxable as leases or rentals of computer software even though the software was never within the state of New York.  The critical issue in this case was that the agreement signed by the parties was referred to as a "license to use" software. As such, despite the lack of any actual  transmission of computer code, the State determined that these were taxable software sales. 

In the January TSB, the state determined that on-line training classes were actually sales of software  and not non-taxable services.  In this ruling, students in New York would log into the system and complete certain training modules.  There was no actual transmission of software code to the client. Again, the State of New York determined that these were taxable sales of software and that tax should be collected.

These are very troublesome rulings to me.  In both of these cases, the underlying service being provided by the software company was either data processing or some other non-taxable service.  Because New York does not accept the "true object" test, it will look at the contracts and invoices to determine what is taxable and what is not, regardless of what the underlying transaction is.  As such, you may want to start labeling your agreements "service agreements" and not "software licensees."

In each ruling, the state dodges the critical issue of really analyzing why the mere access of a program through the Internet is actually a means of "conveyance" of software which is required by the statute before it can be taxed.  To me, conveyance and access are two separate issues. 

If you provide ASP or SAAS services to New York customers, you may want to review your contracts and review your tax policies in light of these two rulings.  This is is a very critical issue that needs to be resolved in the New York tax courts and not at the tax policy level.

Give me your feedback or some comments on this issue.