SALT Year-end Updates
@BDO_USA_Tax
SALT YEAR-END UPDATES
November 2016
BDO USA, LLP, a Delaware limited liability partnership, is
the U.S. member of BDO International Limited, a UK
company
limited by guarantee,
and forms
partYear-End
of the
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Webinar Series
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Updates
international BDO network of independent member firms.
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WITH YOU TODAY
MARIANO SORI, CPA, JD
Partner and National SALT
Income/Franchise Tax
Practice Leader
TIM SCHRAM
Managing Director and SALT
Credits and Incentives
Practice Leader
STEVE OLDROYD, CPA
Managing Director and
National SALT Sales and Use
Tax Practice Leader
DOROTHY RADICEVICH
Principal and National SALT
Property Tax Leader
ROBERT KAELBER
Managing Director,
Employment Tax
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INTRODUCTORY COMMENTS
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INTRODUCTORY COMMENTS
•
Every year state and local tax laws change and evolve making it a challenge to keep up.
•
This can be seen in the daily state tax news issued by various tax news and research
services, and the tax alerts issued by accounting and law firms.
•
2016 has been no exception as we saw:
-
More states adopt single sales factor apportionment, market sourcing and combined reporting for
income tax purposes.
-
More states expand nexus for sales and use tax purposes and the scope of goods and services
subject to tax, including software/digital goods and related services
-
States modify and expand credit and incentives opportunities
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AGENDA
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AGENDA
• Income/Franchise Tax Updates (Mariano Sori)
• Sales and Use Tax Updates (Steve Oldroyd)
• Tax Credits and Incentives Updates (Tim Schram)
• Employment Tax Updates (Robert Kaelber)
• Property Tax Updates (Dorothy Radicevich)
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INCOME/FRANCHISE TAX UPDATES
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SIGNIFICANT 2016 STATE TAX LEGISLATION
Connecticut (S.B. 1601)
Single Sales Factor Apportionment
• Requires single sales factor apportionment for taxable years beginning on or after
January 1, 2016.
Numerous combined reporting changes, including:
• Excludes a limited partner’s distributive share of income from an investment partnership
from the unitary business, unless the limited partner and the general partner share
common ownership.
•
Applies the “principles” of the federal consolidated return regulations promulgated
under IRC § 1502 to intercompany transactions.
•
Requires the elimination of assets and liabilities attributable to transactions with another
member of the unitary combined group when computing the capital tax base.
•
The tax of a unitary combined group, prior to the surtax and the application of credits,
may not exceed the “nexus combined base tax” by $2.5 million.
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SIGNIFICANT 2016 STATE TAX LEGISLATION
Connecticut (S.B. 1601) (cont’d)
Numerous combined reporting changes, including (cont’d):
• Eliminates the requirement to publish a list of jurisdictions determined to be tax havens,
and excludes a jurisdiction that has entered into a comprehensive income tax treaty with
the U.S. from the definition of “tax haven.”
•
Eliminates from the list of non-taxable members required to be included in a unitary
combined group one that earns more than 20% of its gross income from intangible
property or service-related activities, the costs of which are deductible against the
income of other members of the group.
Personal Income Tax Nonresident Exclusion
• For taxable years beginning after December 31, 2015, excludes compensation paid to a
nonresident individual if the individual spent fewer than 16 days in the state during the
taxable year.
•
Does not apply to athletes or entertainers.
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SIGNIFICANT 2016 STATE TAX LEGISLATION
Connecticut (S.B. 502)
Corporation Income Tax
• Adopts market sourcing for assigning receipts from sales of other than tangible personal
property held primarily for sale (effective for taxable years beginning on or after January
1, 2016).
•
Market sourcing provision includes various assignment rules including:
-
Receipts from services are sourced to the state to the extent the service is used at a location in
the state.
Receipts from the sale or other disposition of tangible personal property (“TPP”), real property, or
intangible property are excluded entirely from the sales factor if such property is not held by the
taxpayer primarily for sale in the ordinary course of business.
Personal Income Tax
• Adopts single sales factor apportionment and applies to the income of a nonresident
individual, including a nonresident partner’s, shareholder’s, and beneficiary’s share of
income (effective for taxable years beginning on or after January 1, 2017).
•
Adopts market sourcing for apportionment (effective for taxable years beginning on or
after January 1, 2017).
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SIGNIFICANT 2016 STATE TAX LEGISLATION
Louisiana (H.B. 7, 19, 20, 29, 47, 55, and 116)
NOL Carryover Limitation
• Further limits the amount of deductible net operating loss (“NOL”) carryover to 72% of
Louisiana net income (retroactively effective as of January 1, 2016).
•
Changes the ordering of the application of NOL carryovers to the most recent taxable
year where a loss from more than one year must be taken into account (effective
January 1, 2017).
•
The new limitations do not apply to amended returns filed on or after July 1, 2015, when
the NOL was originally claimed on a return filed prior to July 1, 2015.
Related Party Expense Addback
• Requires addback of interest expenses/costs, intangible expenses/costs, and
management fees paid to a related member, subject to several exceptions (effective
taxable years beginning after December 31, 2015).
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SIGNIFICANT 2016 STATE TAX LEGISLATION
Louisiana (H.B. 7, 19, 20, 29, 47, 55, and 116) (cont’d)
Non-Graduated Corporation Income Tax Rate
• Adopts a non-graduated, 6.5% corporation income tax rate (effective taxable years
beginning after December 31, 2016).
Franchise Tax
• Imposes the tax on an entity taxed as a corporation for federal income tax purposes
(unless it is an LLC taxed as an S corporation, or any other entity that was acquired by an
S corporation in 2012 or 2013).
•
Imposes the tax on a corporation that owns property located in the state through a
partnership, LLC taxed as a partnership for federal income tax purposes, joint venture,
or any other business organization of which the corporation is a member of a controlled
group of corporations as defined in IRC § 1563.
•
Provides for an additional holding company deduction for investments and advances to an
80% or more owned subsidiary that is subject to the franchise tax.
•
Increases the initial tax imposed on a newly taxable corporation from $10 to $110
(effective taxable years beginning after December 31, 2015).
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SIGNIFICANT 2016 STATE TAX LEGISLATION
Louisiana (H.B. 20, 2016 2nd Extra. Sess.)
Single Sales Factor
• Apportions income of a corporation using a single sales factor, except for oil and gas
taxpayers (for taxable years beginning on or after January 1, 2016).
•
Oil and gas taxpayers apportion income based on a four factor formula comprised of
property, payroll, and double-weighted sales.
Market Sourcing
• Adopts market sourcing for sales of services and licenses or sales of intangibles (for
taxable years beginning on or after January 1, 2016).
•
Gross receipts from sales of services are sourced to the state to the extent the service is
delivered to a location in the state.
•
Gross receipts from licenses of intangibles are sourced to the state to the extent the
intangible is used in the state.
•
If a taxpayer is not taxable in the state of receipt assignment, or the state of assignment
cannot be reasonably determined under the market sourcing rules, throw-out is applied.
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SIGNIFICANT 2016 STATE TAX LEGISLATION
Nevada (Adopted Regulation R123-15)
Commerce Tax
•
•
•
•
•
•
•
Adopts regulations to accompany the Commerce Tax that was enacted in June 2015, and which applies
to taxable years beginning on or after July 1, 2015.
Defines “engaging in business” and includes such activities as commencing, conducting, or continuing
a business, and the exercise of corporate or franchise powers regarding a business.
- Expands definition to include 20 activities that may constitute engaging in business.
Adopts a physical presence nexus standard, but this could change based on a provision in the
regulations.
- “Any other activity that constitutes sufficient nexus to subject the business entity to the
commerce tax in a manner consistent with the United States Constitution.”
Clarifies that an entity doing business in the state with Nevada receipts under the $4 million threshold
must file an abbreviated informational report.
Sources receipts from the sale of a service to the state to the extent the purchaser received benefit
from the service in Nevada.
Exempts a business if it confines its activities in the state to the owning, maintenance, and
management of “intangible investments.”
Allows an employer to take a credit against the Nevada Payroll Tax equal to 50% of the Commerce Tax
paid for the preceding taxable year.
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INCOME/FRANCHISE TAX NEXUS CONTROVERSIES AND
DEVELOPMENTS
California
Chief Counsel Ruling 2016-03 (July 5, 2016)
• For California Corporation Franchise and Income Tax purposes, sales of TPP and sales
from other than TPP (e.g., royalties) must be combined to determine whether the
taxpayer is doing business in a specific state under the state’s economic/factor presence
nexus statute.
•
Deriving royalty income from a licensee’s use of the taxpayer’s trademarks is not a
protected activity under P.L. 86-272.
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SALES OF STOCK AND OTHER INTANGIBLES – BUSINESS
OR NONBUSINESS INCOME?
Ohio
Corrigan v. Testa, Slip Opinion No. 2016-Ohio-2805 (May 4, 2016)
• Supreme Court held that a nonresident taxpayer’s gain arising from the sale of an
interest in a LLC that did business in the state was not subject to income tax.
•
Ohio Rev. Code § 5747.212, as applied to the taxpayer, violates the Due Process Clause.
•
Taxpayer is a Connecticut resident that owned a 79.29% interest in the LLC, was the
managing member of the LLC, and visited the company’s Ohio headquarters for board
meetings and management presentations.
•
Day-to-day operations were overseen by officers and managers employed by the
company.
•
Court found that an ownership interest in a business is an intangible asset and capital
gain derived from the sale of an intangible asset is allocable as nonbusiness income to a
nonresident taxpayer’s state of domicile.
-
Neither the taxpayer nor the sale of the asset had a taxable link (or unitary relationship) to
Ohio.
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INCOME/FRANCHISE TAX APPORTIONMENT TRENDS
Market-Based Sourcing
Market-Based Sourcing
Market-Based Sourcing
Market-Based Sourcing
Market-Based Sourcing
Where Benefit
Received
Where Service
Received
Where Service
Delivered
Where Customer
Located
Arizona (election)
Connecticut
Alabama
Georgia
California
Illinois
District of Columbia
Maryland
Iowa
Maine
Louisiana
Nebraska
Michigan
Minnesota
Massachusetts
Oklahoma
Missouri (election)
Pennsylvania
New York
Tennessee
Rhode Island
Utah
Wisconsin
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INCOME/FRANCHISE TAX APPORTIONMENT TRENDS
Market-Based Sourcing (cont’d)
Variety of State Approaches to Market-Based Sourcing
• 23 states now require or provide election to use market-based sourcing for corporate
income tax purposes.
•
General rules of sourcing services:
-
•
Hierarchy vs. Proportionate approach:
-
•
“Delivered to a location” in the state.
“Where benefit of the service is received.”
“Where receipts derived.”
Proportionate – services receipts sourced in proportion to the benefit received by the recipient
in the state.
Hierarchy – apply cascading rule; if cannot comply with rule, move to next.
Examples of proportionate states: Georgia, Iowa, Michigan.
Examples of hierarchy states: MTC, California, Illinois, Massachusetts.
Key differences in hierarchy approaches can result in inconsistent sourcing results.
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INCOME/FRANCHISE TAX APPORTIONMENT TRENDS
Market-Based Sourcing (cont’d)
Variety of State Approaches to Market-Based Sourcing (cont’d)
• Throw-out rules.
•
“Look-thru rules” for sales of services to customers of, or through, the customer.
•
Complex regulations vs. simple/general statutory standards.
-
•
Use of examples to illustrate (or implement?) the rule.
Due diligence.
-
Some states impose specific due diligence requirements (e.g., New York).
Contemporaneous record retention that explains the determination and method of sourcing
services.
Document application of the hierarchy and determination to move to next priority rule.
Systems may need to be implemented or modified to conform.
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UNITARY COMBINED REPORTING
Go East Young Man
•
26 of the corporate income/franchise tax states now mandate unitary combined
reporting.
•
Since 2006, 10 states have enacted mandatory unitary combined reporting (most of these
are east of the Mississippi River): Connecticut, District of Columbia, Massachusetts,
Michigan, New York, Rhode Island, Texas, Vermont, West Virginia, and Wisconsin.
Alaska
Idaho
Montana
Texas
Arizona
Illinois
Nebraska
Utah
California
Kansas
New Hampshire
Vermont
Colorado
Maine
New Mexico
West Virginia
Connecticut
Massachusetts
New York
Wisconsin
D.C.
Michigan
North Dakota
Hawaii
Minnesota
Rhode Island
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UNITARY COMBINED REPORTING
Judicial and Administrative Developments
California
FTB Notice 2016-02 (Sept. 9, 2016)
• California taxpayers of a water’s-edge combined group must consent to the water’s-edge
election; failure to consent could terminate election.
•
Unitary foreign affiliates are generally excluded from the water’s-edge group (subject to
certain exceptions).
•
Notice provides guidance whether the water’s-edge election remains intact in situations
where a unitary foreign affiliate becomes subject to California Corporation Franchise or
Income Tax after the enactment of the economic/factor presence nexus statute effective
January 1, 2011.
•
Generally, if certain conditions are met, the unitary foreign affiliate is deemed to have
consented to the water’s-edge election, but only if the foreign affiliate became a
California taxpayer in a taxable year ending on or before December 31, 2016.
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UNITARY COMBINED REPORTING
“Tax Havens”
“Tax Haven” Rules
• New: Alaska, Connecticut (2016), DC, Montana, Oregon, Rhode Island, and West Virginia.
•
“Blacklist” approach: State’s statute lists specific foreign countries as “tax havens” (MT,
OR) and depends on whether the foreign corporation is incorporated in that jurisdiction.
-
CT and DC eliminated their “blacklist” approach, but still include “tax haven” corporations in the
water’s edge combined group.
•
“Definitional/MTC” approach: Foreign country has no or a nominal tax on net income
and has laws that prevent exchange of information, “lacks transparency,” substantive
local presence not required, or has created a regime favorable for tax avoidance (CT,
DC, RI, WV).
•
Alaska approach: Foreign country with no income tax or that imposes a rate that is 90%
of the U.S. rate.
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CHALLENGES TO RELATED PARTY TRANSACTIONS AND
ECONOMIC SUBSTANCE
Transfer Pricing
District of Columbia
D.C. Office of Tax & Revenue v. ExxonMobil Oil Corp., No. 14-AA-1401 (D.C. Ct. App. June
30, 2016)
• Office of Administrative Hearings (“OAH”) granted summary judgment in favor of the
taxpayers on the grounds that nonmutual offensive collateral estoppel should preclude
the D.C. Office of Tax and Revenue (“OTR”) from relitigating whether a certain transfer
pricing methodology can be used to assess franchise taxes.
• Taxpayers challenge transfer pricing analysis prepared by a contractor (Chainbridge
Software LLC) which was litigated in Microsoft Corp. v. Office of Tax and Revenue.
• Appeals Court remanded the case back to the OAH for further proceedings, noting that
the OAH did not consider whether exceptional circumstances existed.
• Technical merits of the District’s transfer pricing methodologies are yet to be
determined.
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CHALLENGES TO RELATED PARTY TRANSACTIONS AND
ECONOMIC SUBSTANCE
Transfer Pricing (cont’d)
Indiana
Columbia Sportswear USA Corp. v. Indiana Dept. of State Revenue, No. 49T10-1104-TA00032 (Ind. Tax Ct. Dec. 18, 2015) and Letter of Findings 02-20150171 (Aug. 31, 2016)
• In Columbia, the Court held that the Department lacked authority to recalculate the
corporation’s income tax base and found no evidence that standard sourcing rules failed
to fairly represent income.
-
•
Under alternative apportionment provisions, the Department can only use methods that divide the
tax base, not methods that recalculate it.
Transfer pricing studies showed transactions were conducted at arm’s-length and the Department
did not provide evidence to show that they were invalid.
In the Letter of Findings, the Department was also unable to show with sufficient
specificity why the taxpayer’s transfer pricing study should be rejected.
-
The authority to use alternative apportionment is “ambiguous” and such ambiguities are to “be
resolved against the Department.”
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CHALLENGES TO RELATED PARTY TRANSACTIONS AND
ECONOMIC SUBSTANCE
Related Party Expense Add-Back (cont’d)
Pennsylvania
Information Notice 2016-1 (Feb. 19, 2016)
• 72 Pa. Stat. § 7401(3)l.(t) requires the add-back of deductions taken for federal purposes
for payments of intangible expenses (and intangible related interest expenses) to related
parties.
• The Information Notice provides the Department’s position on:
-
Applicable intangible assets.
Direct or indirect intangible expense of costs (including amortization and embedded intangible
costs).
Interest expenses are presumed “directly related” to an intangible expense if the taxpayer
engaged in any intangible expense transaction with the related party.
Add-back exceptions: Principal purpose transactions, arm’s-length, foreign treaty, and conduit.
Application of the “subject to tax” credit.
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INCOME/FRANCHISE TAX BASE
Net Operating Losses
Pennsylvania
Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth of Pennsylvania, Docket
No. 98 F.R. 2012 (Pa. Commw. Ct. 2015)
•
•
•
•
•
Court held that the state’s net operating loss deduction (“NOLD”) limitation, as applied to the
taxpayer, violates the Uniformity Clause of the Pennsylvania Constitution.
2007 NOLD limitation limits the use of NOLDs to the greater of $3 million or 12.5% of taxable income.
Court granted the taxpayer full use of its NOL carryovers.
NOLD limitation creates classes of taxpayers according to their taxable income.
Appeal was filed on January 20, 2016, and is currently before the Pennsylvania Supreme Court.
RB Alden Corp. v. Commonwealth of Pennsylvania, No. 73 F.R. 2011 (Pa. Commw. Ct. June
15, 2016)
•
•
Court held that 2006 NOLD violates the Uniformity Clause of the Pennsylvania Constitution.
Court granted the taxpayer full use of its NOL carryovers, an outcome that matches the remedy in
Nextel.
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INCOME/FRANCHISE TAX BASE
Net Operating Losses (cont’d)
South Carolina
Revenue Ruling No. 16-7 (July 6, 2016)
• Discusses the application of IRC § 382 as it relates to a multi-state SC taxpayer.
• Since SC typically requires separate company reporting, the SC 382 Limitation of a multistate corporation is the product of the federal 382 Limitation of the loss corporation as
calculated on a separate company basis, and the loss corporation’s SC apportionment
percentage for the year in which the ownership change occurs.
• Addresses the SC 382 Limitation adjustments necessary for recognized built-in gains and
losses.
• Applies to all periods open under statute.
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SALES AND USE TAX UPDATES
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SALES/USE TAX NEXUS TRENDS
Click-Thru Nexus
•
Originated via New York law enacted on April 23, 2008, that creates a sales tax collection
presumption with respect to an out-of-state seller that enters into an agreement with a
NY resident for website referrals where the seller pays a commission based on sales
generated therefrom, and NY sales resulting from referrals arising from all such
arrangements exceed $10,000. See N.Y. Tax Law § 1101(b)(8)(vi).
-
•
Presumption – A seller that makes taxable sales of TPP or services in a state has nexus when a
state resident’s website clicks through potential customers to the seller.
Rationale – Seller has a physical presence in the state through an agent (i.e., the NY resident).
New York Court of Appeals held that NY’s click-thru nexus law is not unconstitutional
because the in-state physical presence may be satisfied via economic activities
performed in New York by the seller’s employees or on its behalf. Overstock.com, Inc. v.
N.Y. Dept. of Tax & Fin., Opinion Nos. 33 and 34 (N.Y. Mar. 28, 2013).
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SALES/USE TAX NEXUS TRENDS
Click-Thru Nexus (cont’d)
States with Click-Thru Nexus
Effective
Date
State
Arkansas
Oct. 24, 2011
Annual Threshold
Statute
More than $10,000
Ark. Code § 26-52-117(d)
California
Sept. 15, 2012
More than $10,000 through affiliates and more than $1 million in annual in-state sales
Cal. Rev. & Tax Code § 6203(c)
Connecticut
July 1, 2011
More than $2,000
Conn. Gen. Stat. § 12-407(a)(12)
Georgia
Oct. 1, 2012
More than $50,000
Ga. Code § 48-8-2(8)(M)
Illinois
Jan. 1, 2015
More than $10,000
35 ILCS 105/2
Kansas
Jul. 1, 2013
More than $10,000
Kan. Stat. § 79-3702(h(2)(C)
Louisiana
Mar. 14, 2016
More than $50,000
Maine
Oct. 9, 2013
More than $10,000
Me. Rev. Stat tit. 36, 1754-B(1-A)(C)
Michigan
Oct. 1, 2015
More than $10,000 through affiliates and more than $50,000 in annual in-state sales
Mich. Comp. Laws § 205.52b
Jul. 1, 2013
Minnesota
H.B. 30, 2016 1st Extra.Sess. (La. 2016)
More than $10,000
Minn. Stat § 297A.66(4a)
Missouri
Aug. 28, 2013
More than $10,000
Mo. Rev. Stat. § 144.605(2)(e)
Nevada
Oct. 1, 2015
More than $10,000
A.B. 380, 78th Legis. Sess. (Nev. 2015).
New Jersey
Jul. 1, 2014
More than $10,000
N.J.R.S. § 54:32B-2(i(1)(C)
New York
Jun. 1, 2008
More than $10,000
N.Y. Tax Law § 1101(b)(8)(vi)
North Carolina
Aug. 7, 2009
More than $10,000
N.C. Gen Stat. § 105-164.8(b)(3)
Pennsylvania
Sept. 1, 2012
None specified
Pa. Bul. No. SUT 2011-01 (Dec. 1, 2011)
Rhode Island
Jul. 1, 2009
More than $5,000
R. I. Gen. Laws § 44-18-15
Tennessee
July 1, 2015
More than $10,000
Tenn. Code § 67-6-520
Vermont
Dec. 1, 2015
More than $10,000
Vt. Stat. tit. 32, § 9701(9)(I)
Washington
Sept. 1, 2015
More than $10,000
Wash, Rev, Code § 82.08.052(1)
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SALES/USE TAX NEXUS TRENDS
Affiliate Nexus
•
In Colorado, a person is presumed to be doing business if the person is part of a
controlled group of corporations that has a component member that has a physical
presence in the state and the component member:
-
Sells TPP or taxable services under the same or a similar business name;
Maintains an office, distribution facility, salesroom, warehouse, storage place, or other similar
place of business in the state;
Uses trademarks, service marks, or trade names in the state that are the same or substantially
similar;
Delivers, installs, or assembles TPP in the state, or performs maintenance or repair services on
TPP in this state, which is sold to in-state customers by the person;
Facilitates the delivery of TPP to in-state customers of the person by allowing such customers to
pick up TPP sold by such person at an office, distribution facility, salesroom, warehouse, storage
place, or other similar place of business maintained in the state. See Colo. Rev. State. § 39-26102(3)(d).
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SALES/USE TAX NEXUS TRENDS
Affiliate Nexus (cont’d)
•
In Texas, a retailer is engaged in business in the state if it holds a substantial ownership
interest in, or is owned in whole or substantial part by, a person who maintains a
location in the state and the retailer:
-
•
Sells the same or a substantially similar line of products as the person with the location in this
state; and
Sells those products under a business name that is the same as or substantially similar to the
business name of the person with the location in this state. See Tex. Tax Code 151.107(a)(7)(A).
States that have recently enacted affiliate nexus laws include:
-
Louisiana, H.B. 30, 1st Extra. Sess. (La. 2016).
Michigan, Rev. Admin. Bul. 2015-22 (Nov. 3, 2015).
Nevada, A.B. 380, 78th Legis. Sess. (Nev. 2015).
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SALES/USE TAX NEXUS TRENDS
Economic Nexus
Alabama
Ala. Reg. 810-6-2-.90-03 (effective Jan. 1, 2016)
•
•
A remote seller is required to collect and remit sales tax if:
- Its Alabama sales exceed $250,000; and
- It distributes advertising matter in the state, or solicits sales by mail or pursuant to a contract
with a cable television operator, broadcaster or publisher located in the state.
On June 8, 2016, Newegg, Inc. filed a Notice of Appeal in the Alabama Tax Tribunal challenging the
economic nexus regulation.
South Dakota
S.B. 106 (S.D. 2016) (effective May 1, 2016)
•
•
A remote seller is required to collect and remit sales tax if:
- The seller’s South Dakota gross revenue from the sale of TPP, any product transferred
electronically, or services delivered into South Dakota exceeds $100,000; or
- The seller sold TPP, any product transferred electronically, or services for delivery into South
Dakota in 200 or more separate transactions.
Litigation is underway challenging the economic nexus standard.
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SALES/USE TAX NEXUS TRENDS
Economic Nexus (cont’d)
Tennessee
Rule 1320-05-01-.129 (effective January 1, 2017)
• An out-of-state dealer has substantial nexus in the state if:
-
•
It engages in the regular or systematic solicitation of consumers in the state through any means;
and
During the previous 12 month period, its Tennessee sales exceed $500,000.
Must register for sales and use tax purposes by March 1, 2017, and report and pay tax on
sales of TPP and other taxable items delivered to Tennessee consumers beginning July 1,
2017.
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SALES/USE TAX NEXUS TRENDS
Economic Nexus (cont’d)
Vermont
H.B. 873 (Vt. 2016)
• A vendor has sales and use tax nexus in Vermont if:
-
•
During any 12 month period, its Vermont taxable sales are at least $100,000, or it has 200 or more
individual sales transactions with Vermont customers; and
It engages in regular, systematic, or seasonal sales of TPP in the state by the display of
advertisements, the distribution of catalogues, periodicals and flyers, or by radio, television, mail,
Internet, telephone, computer database, cable optic, cellular, or other communication systems.
Effective the later of July 1, 2017, or beginning on the first day of the first quarter after
a U.S. Supreme Court decision, or federal legislation is enacted, that overturns the
physical presence requirement of Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
Justice Kennedy noted in his concurring opinion in Direct Marketing Ass’n v. Brohl, 135 S.
Ct. 1124 (2015) that it may be time to reconsider the Quill physical presence standard.
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SALES/USE TAX NEXUS TRENDS
Use Tax Reporting
Colorado
• Colorado law requires a non-collecting retailer to:
-
•
•
Send a notice to Colorado customers that their purchases may be subject to use tax;
Send customers an annual purchaser summary if their aggregate purchases exceed $500; and
Provide a customer information report to the Department of Revenue. See Colo. Rev. Stat. § 3921-112(3.5)(d).
In Direct Marketing Ass’n v. Brohl, No. 12-1175 (filed Feb. 22, 2016), the U.S. Court of
Appeals for the Tenth Circuit upheld Colorado’s use tax reporting law because the Quill
physical presence requirement is limited to sales and use tax collection.
Petition for writ of certiorari was filed with the U.S. Supreme Court on August 29, 2016.
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SALES/USE TAX NEXUS TRENDS
Use Tax Reporting (cont’d)
Louisiana
H.B. 1121 (La. 2016) (effective July 1, 2017)
•
An out-of-state vendor that is not subject to sales tax where the cumulative Louisiana sales of the
retailer and its affiliates exceed $50,000 per calendar year must:
- At the time of the sale – Provide Louisiana purchaser with notice that its purchase is subject to use
tax.
- By January 31st of each year – Send annual notice to Louisiana purchaser that contains the amount
paid for purchases in the preceding calendar year.
- By March 1st of each year – File annual statement with the Department that includes the total
amount paid by the purchaser in the past calendar year.
Oklahoma
H.B. 2531 (effective November 1, 2016)
•
•
Requires a remote retailer or vendor that is not required to collect use tax to provide notification by
February 1 of each year to an Oklahoma customer to whom TPP was delivered during the preceding
calendar year.
Notification states that customer may owe use tax on the purchase, and, if so, customer should report
and pay with his or her Oklahoma income tax return.
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SALES/USE TAX NEXUS TRENDS
Use Tax Reporting (cont’d)
Vermont
H.B. 873 (Vt. 2016)
• Noncollecting vendor is a vendor that makes taxable sales to Vermont purchasers, but
does not collect sales tax, and must:
-
-
•
Notify a Vermont purchaser that sales or use tax is due, and that Vermont requires the tax to be
paid on his or her tax return.
Failure to provide notice may result in a $5 penalty for each instance of noncompliance.
Send notification to a Vermont purchaser who had made $500 or more of purchases in the
preceding calendar year that shows the total amount paid by the purchaser.
Failure to provide notice may result in a $10 penalty for each instance of noncompliance.
Effective the earlier of July 1, 2017, or beginning on the first day of the first quarter
after the sales and use tax reporting requirements challenged in Direct Marketing Assoc.
v. Brohl, 814 F. 3d 1129 (10th Cir. 2016) are implemented by Colorado.
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REMOTE SALES CONGRESSIONAL PROPOSALS
Marketplace Fairness Act
What is the Marketplace Fairness Act (“MFA”)?
• Proposed legislation pending the U.S. Congress that would enable state governments to
collect sales/use tax from remote retailers with no physical presence in their state.
• Legislative history:
-
-
•
113th Legislative Session (Marketplace Fairness Act of 2013)
Introduced in the Senate as S.B. 743 on April 16, 2013, the Senate passed the bill on May 6,
2013, but it died in the House.
Was introduced in the Senate again on July 15, 2014 as S.B. 2609 (Marketplace and Internet
Tax Fairness Act), but was not passed by the Senate.
114th Legislative Session (Marketplace Fairness Act of 2015)
S.B. 698 – Read twice and referred to the Committee on Finance on March 10, 2015.
Small Seller Exemption: Exemption threshold in order to avoid the burden of collecting
out-of-state sales/use tax is set at only $1 million of gross sales.
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REMOTE SALES CONGRESSIONAL PROPOSALS
Other Proposals
Remote Transactions Parity Act of 2015 (“RTPA”)
• The RTPA (H.R. 2775) addresses the Internet sales tax issue using the structure of the
MFA.
• The RTPA retains many features of the MFA, but adds protections for remote sellers and
certified software providers.
• Referred to the Subcommittee on Regulatory Reform, Commercial And Antitrust Law on
July 1, 2015.
• Would adopt a 3 year phase-in of small seller exemption noted in the MFA.
No Regulation Without Representation Act
• H.R. 5893 was introduced on July 14, 2016 and would codify the physical presence rule
for sales tax collection and reporting purposes established in Quill Corp. v. North Dakota,
504 U.S. 298 (1992).
• Creates a de minimis threshold for physical presence, provides protection for any person
other than a purchaser or seller having a physical presence in the state, and provides
specific exclusions.
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SALES TAX IN THE CLOUD
Overview
•
•
Generally, sales tax is imposed on all sales of TPP and specifically enumerated services.
Services – Taxation of services varies by state (e.g., compare IL, CA, TX).
Traditional Taxable Services
•
Cable television services
•
Repair and maintenance of TPP
•
Printing services
•
Personal services
•
Landscaping services
•
Dry cleaning services
•
Amusement services
Recent Trends
•
Data processing services
•
Information services
•
Telecommunication /
communication services
(expanding interpretation)
•
Computer Services
(ASP/SaaS/Cloud Computing)
•
Digital Goods
Digital Goods ‒ What is it?
•
Tangible Personal Property
•
Data Processing
•
Information Services
•
Telecommunications / Ancillary
•
Services
•
Software
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SALES TAX IN THE CLOUD
Electronically Delivered Software
7-Eleven Inc. v. Combs, 311 S.W.3d 676
(Tex. App. 2010).
Dechert LLP v. Commonwealth of
Pennsylvania, 998 A.2d 757 (Pa. 2010).
•
•
Canned software constitutes tangible personal
property.
•
Purchases of licenses to use canned software are,
therefore, subject to Pennsylvania sales and use
tax.
•
The delivery method for the software does not
determine the taxability, according to the PA
Supreme Court.
•
UPDATE: Electronically accessing software is
taxable because the user is exercising control
over the software. Leg. Ltr. Rul. No. SUT-12-011,
Pa. Dept. of Rev. (May 31, 2012).
•
•
7-Eleven argued its purchase of financial software
qualified for a “sale for resale” exemption for
software transferred to third-party franchisees
outside of Texas.
Transfer to corporate owned stores outside of
Texas not resolved. Issue was remanded to
determine whether there was use in Texas, what
kind of software was purchased and whether that
purchase could be properly allocated between
company stores and franchise stores.
Comptroller argued that the true purpose of the
software was to automate 7-Eleven’s stores for its
own benefit, and that 7-Eleven used the software
to provide data processing services.
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SALES TAX IN THE CLOUD
Cloud Computing Platforms
•
Hardware and software resources made available on the Internet and managed third
party services.
•
May be referred to as Application Service Provider (ASP), Software as a Service (SaaS), or
Cloud Computing.
-
Software housed and accessed remotely.
No downloads or delivery.
User may install temporary “applet” on computer/server.
State may treat transaction as sale/license of electronically delivered software.
Provision of computer services (e.g., data processing, information services).
Specific tax treatment of ASP/SaaS transaction (e.g., CO, NC, TX, WA).
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SALES TAX IN THE CLOUD
Platform – Application Service Provider (“ASP”)
Application Service Provider (“ASP”)
• Provider retains custody over (or “hosts”) software for use by third parties. Users of the
software hosted by an ASP typically will access the software via the Internet. The ASP
may or may not own or license the software, but generally will own and maintain
hardware and networking equipment required for the user to access the software. The
ASP may charge the user a license fee for the software (in instances where the ASP owns
the software) and/or a fee for maintaining the software/hardware used by its customer.
•
Typically the provider:
-
Fully owns and operates the software applications;
Owns, operates, and maintains the servers that support the software;
Makes information available to customers via the Internet or a “thin client”; and
Bills on a “per-use” basis or a monthly/annual fee.
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SALES TAX IN THE CLOUD
Platform – Software as a Service (“SaaS”)
Software as a Service (“SaaS”)
• “The capability provided to the consumer is to use the provider’s applications running on
a cloud infrastructure. The applications are accessible from various client devices or
through a thin client interface such as a web browser (e.g., web-based email). The
consumer does not manage or control the underlying cloud infrastructure including
network, servers, operating systems, storage, or even individual application capabilities,
with the possible exception of limited user-specific application configuration settings.”
•
Includes applications both in general, such as word processing, email, spreadsheet, and
specialized, such as customer relationship management (“CRM”), enterprise resource
management (“ERM”), etc.
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SALES TAX IN THE CLOUD
Understanding Cloud Services
What is Cloud Computing?
• Cloud computing is a model for enabling ubiquitous, convenient, on-demand network
access to a shared pool of configurable computing resources (e.g., networks, servers,
storage, applications, and services) that can be rapidly provisioned and released with
minimal management effort or service provider interaction (The NIST Definition).
• Benefits of cloud computing:
-
Fully scalable.
No major hardware or software upgrades required.
Enables better use of IT budgets – No large fixed investments.
Customer pays only for what it uses.
Accessible from the Internet – Use software on terminal, but it resides on the server maintained by
the cloud provider.
Location of the server, to the extent relevant, may be difficult to determine, particularly in the
case of large providers that have facilities in multiple locations.
Worldwide market for public cloud services is forecast to reach $203.9B in 2016, a more
than 16% year-over-year increase – 24/7 Wall St.
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SALES TAX IN THE CLOUD
Understanding Cloud Services (cont’d)
Platforms
•
Infrastructure as a Service (“IaaS”)
• Raw computing power, storage and
network bandwidth.
•
Platform as a Service (“PaaS”)
• Database, development tools and
other components required to support
the delivery of custom applications.
Deployment
•
•
•
•
Private: Hosted
Community: SaaS provider
Public: Amazon, Rackspace
Hybrid: Combinations of 1, 2, 3
•
Means of delivery include:
• The Internet (including downloading,
web-browser access, streaming access)
• Wireless carrier
• Satellite
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SALES TAX IN THE CLOUD
Examples
•
•
•
•
•
•
•
•
•
•
Online learning and education.
Online health and medical advice.
Social Networking websites.
Transferring funds between banks.
Salesforce.com – CRM software.
Web-based email.
Google Wave – Collaboratively work on same documents at same time.
Virtual IT – EC2 – Online servers.
Apple MobileMe – Online network storage.
Amazon Elastic Computer Cloud – Synchronization, back-up and utility computing.
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SALES TAX IN THE CLOUD
To Which State Should the Transaction be Sourced?
•
No delivery, so no destination state?
•
If sourced based on use, which is the state of use?
-
•
Location of customer/user.
Location of the software/server.
Conflict with sourcing between states that source SaaS sales based upon location of customer vs.
location of server.
If sourced by use and location of customer
-
How do we determine where user is and use by customer occurs?
Factors:
Location of the server: What if multiple servers are involved?
Seller location: Where application is developed and maintained?
Customer billing address.
User location: Allocation of contracts/licenses for users in multiple locations?
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SALES TAX IN THE CLOUD
Hosted Software
Washington
Kansas
Wash. Rev. Code § 82.04.050(6)(c)
The term “retail sale” includes “the charge made to consumers
for the right to access and use prewritten computer software,
where possession of the software is maintained by the seller or a
third party, regardless of whether the charge for the service is
on a per use, per user, per license, subscription, or some other
basis.”
Kansas Opinion Letter No. O-2010-005 (Jun. 22, 2010)
Fees charged by an ASP provider to its customers for ASP
services are not subject to sales tax. Such fees include recurring
monthly charges, set-up fees, support fees, training fees, data
migration fees, and forms programming fees. However, the sale
of canned software that can be used independent of the ASP
service is subject to sales tax. See also Opinion Letter No. O2012-001, Kan. Dept. of Rev. (Feb. 6, 2012).
Massachusetts
Florida
Ltr. Rul. No. 11-4, Mass. Dept. of Rev. (Apr. 12, 2011)
Sale, license and right to use software on a server hosted by the
taxpayer or a third party are taxable.
TAA 10A-051, Fla. Dept, of Rev. (Dec. 6, 2010)
Sales of online authentication services to customers via the
provision of a digital certificate (which allow an end user to
recognize that he or she is indeed accessing the customers’
website) are not taxable.
When there is no charge for the use of the software and the
object of the transaction is acquiring a good or service other
than the use of the software, sales tax doesn’t apply.
Taxpayer provided information services to its customers based
on data from prospective employees and then provides this
information to its customers in a report.
The object of the transaction was the database access, including
reports prepared by the taxpayer, rather than use of the
software; therefore the transaction was a nontaxable sale of
services.
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SALES TAX IN THE CLOUD
Cloud Computing/ASP/SaaS
Minnesota
•
•
•
•
•
Cloud computing not subject to sales tax regardless of server location – Considered an information
service.
Hosted on service provider’s server.
Customer only has remote access to software.
Customer’s use of the software is for processing only.
Charges for maintenance and support are also not taxable.
New York
TSB-A-11(17)S, N.Y. Comm’r of Tax. & Fin. (June 1, 2011)
•
•
•
Hosted marketing service provided to clients that use email, direct mail and other marketing channels
to reach their customer is subject to sales and use tax as the sale of prewritten software.
Taxpayer licenses to clients the right to use the software housed on the taxpayer’s servers for the
purpose of marketing campaigns.
Taxpayer’s charges for optional training and consulting services not performed through software were
not taxable.
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SALES TAX IN THE CLOUD
Cloud Computing/ASP/SaaS (cont’d)
Colorado
PLR-11-007, Colo. Dept. of Rev. (Dec. 20, 2011) (Ruling on web-based IT solution)
• Fees related to web-based file transfer and tracking solution are not subject to sales or
use tax.
• Similar to Google email services.
• Essence of the transaction: Not the license of software or use of hardware, but obtaining
a nontaxable service.
• Rental of hardware: Customer did not have sufficient degree of control, e.g., seller
retained custody of servers.
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SALES TAX IN THE CLOUD
Cloud Computing/ASP/SaaS (cont’d)
Iowa
Policy Ltr. 12300002, Ia. Dept. of Rev. (Jan. 11, 2012) (Hosted software and training)
• Hosted software and training fees are not subject to Iowa sales or use tax.
• Cited the National Institute for Standards and Technology’s definition of cloud
computing.
• Noted that no software is downloaded or delivered to customers; title/possession not
transferred.
• Fees meet definition of cloud computing services.
• No statutory Iowa authority to tax such services.
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SALES TAX IN THE CLOUD
Cloud Computing/ASP/SaaS (cont’d)
New York
TSB-A-06(5)S, N.Y. Comm’r of Tax. & Fin. (Feb. 2, 2006) (Online educational services,
bundled software/services)
• Primary objective: Service or software?
• Taxpayer, a learning subsidiary of Cornell University, provided software to customers for
professional development skills. Upon completion of the Internet course, it awarded a
certificate of completion.
• Academic support (hosting online discussions) offered as a service.
• Held nontaxable. Rationale was that the students’ primary objective is to attend a
course of study. Students were not purchasing software.
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SALES TAX IN THE CLOUD
Cloud Computing/ASP/SaaS (cont’d)
New York
TSB-A-15(2)S, N.Y. Comm’r of Tax. & Fin. (Apr. 14, 2015) (Cloud computing product)
• Primary objective: Service or software?
• The taxpayer’s cloud computing product provided business customers with Internet
infrastructure, which could be used to run applications for internal use, or host a website
(i.e., a virtual server that allows customers to access computing power).
• The taxpayer billed customers based on hourly rates, and made available software, data,
and other content (collectively, operating system) necessary for use of the cloud
computing product at no charge.
• Held nontaxable. The customer subscribes to the product to run its applications – not
the operating software, taxpayer’s advertising emphasizes right to use computing power,
and the transfer of software (if any) is an incidental part of the cloud computing product.
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SALES TAX IN THE CLOUD
Cloud Computing/ASP/SaaS (cont’d)
New York
TSB-A-15(28)S, N.Y. Comm’r of Tax. & Fin. (July 9, 2015) (Online meetings and conferences,
and remote access computer products)
• Primary objective: Service or software?
• Taxpayer provided products to customers, which enabled them to remotely: (i)
host/participate in online meetings, (ii) organize/present online conferences/webinars,
(iii) provide live technical support, and (iv) remotely access computers.
• Taxpayer did not provide software license, customers paid a monthly subscription fee,
and each product was separately available for sale.
• Held all nontaxable. Rationale was that the Department has held that “bridging”
services are not taxable telecommunication services, the customer only downloaded a
Java applet, and the recording feature usable with respect to some of the products had
limited functionality.
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SALES TAX IN THE CLOUD
Cloud Computing/ASP/SaaS (cont’d)
New York
TSB-A-16(6)S, N.Y. Comm’r of Tax. & Fin. (Feb. 25, 2016) (Internet-based document transfer
subscription plan)
• Primary objective: Service or software?
• The taxpayer provides a solution for sending, receiving and tracking large digital files via
the Internet on a paid (monthly or annual subscriptions) and free basis, depending on
data transfer/storage level.
• As part of the free and paid plans, the taxpayer makes available optional “plug-ins” and
applications at no charge, which the customer can download by accepting a software
license (less than 2% of customers download these applications).
• Depending on the plan level, the customer is able to use certain functions, such as
setting file transfer expiration dates, file transfer/download notifications, send and
receive track, custom branding of emails, etc.
• Held nontaxable. Rationale was the primary purpose of the product is to permit
customers to send large files, and any additional functionality was ancillary.
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SALES TAX IN THE CLOUD
Cloud Computing/ASP/SaaS (cont’d)
Tennessee
• 2015 Revenue Modernization Act added T.C.A. § 67-6-231(a)(2) to tax “use of computer
software in the sate,” and to treat access to SaaS software by a user in TN as the
electronic delivery of the software for use in TN (effective July 1, 2015).
• Purchase price consideration allocated among multiple points of use if customer accesses
from locations in TN and outside TN.
• Exception from tax: Access to SaaS software is for a non-taxable service provided to the
TN user/customer.
• Department of Revenue has issued five Letter Rulings providing guidance on
Department’s interpretation of Section 67-6-231(a)(2) and taxable/non-taxable SaaS
transactions – See Letter Rulings 15-07, 15-08, 15-09, 16-01, and 16-02.
• Example (Letter Ruling 15-07): Access to SaaS software under basic “subscription
package” for customer’s use in performing its business processes was taxable use of
software; access to same SaaS software under “business process outsourcing package” to
enable vendor to perform the business process services for the customer was a nontaxable access.
• “True object” test applies.
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SALES TAX IN THE CLOUD
Cloud Computing/ASP/SaaS (cont’d)
Virginia
Ruling of the Commissioner, P.D. 16-135 (June 24, 2016)
•
•
•
•
•
•
•
•
•
•
Taxpayer is a LLC that licenses basic software from a software developer, customizes the software,
and resells the customized basic software to the taxpayer’s clients.
Taxpayer purchases license agreements through a reseller for the developer, and all transactions are
performed through cloud computing services.
Taxpayer is located and headquartered outside of Virginia.
The servers from where the software and data are hosted and backed-up (“Data Centers”) are owned,
operated and maintained by the developer.
One Data Center to which the taxpayer has remote access is located in Virginia, but the taxpayer has
no access to, or control over, any server.
Cloud computing services are generally treated in the same manner as the electronic download and
transfer of software products.
No transfer or provision of TPP with cloud computing services.
Taxpayer incurs no taxable use in downloading from the developer’s servers in Virginia.
Taxpayer would not be required to pay Virginia sales tax to the reseller or to the developer.
Taxpayer would not charge sales tax to its Virginia clients.
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SALES TAX IN THE CLOUD
Cloud Computing/ASP/SaaS (cont’d)
Chicago Lease Tax Ruling #12
• Applies the 9% Personal Property Lease Transaction Tax to a charge paid:
-
For cloud computing, cloud services, hosted environment, SaaS, PaaS, and IaaS; and
To obtain data that has been compiled, entered and stored on the provider’s computer.
•
Provides rules related to sourcing and Exemption #11, which exempt a charge for access
to information or data which is entirely passive without interactive use (e.g., streaming
data), and materials that are primarily proprietary in nature (e.g., copyrighted
newspapers, newsletters or magazines).
• Department has announced it will postpone the effective date of Ruling #12 until January
1, 2016.
Chicago 2016 Revenue Ordinance
• Applies a reduced 5.25% rate to “the lease of a computer primarily for the purpose of
allowing the customer to use the provider’s computer and software to input, modify or
retrieve data or information that is supplied by the customer.”
• Provides for a “small new business” exemption – license issued in the most recent full
calendar year, under $25 million in gross receipts (determined on a unitary business
group basis), and has been in operation for fewer than 60 months.
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TAX CREDITS AND INCENTIVES UPDATES
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TAX CREDITS AND INCENTIVES UPDATES
GASB Statement No. 77
•
Requires government entities include details of all abatement/incentives granted to
businesses.
•
Issued August 14, 2015
•
Effective December 15, 2015
•
Included in Implementation Guide 2016-1
•
Disclosures include:
-
Tax being abated;
Total dollar amount abated; and
Types of commitments made by both the recipient and the government.
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TAX CREDITS AND INCENTIVES UPDATES
FASB Topic 832
Background
• Reporting to increase transparency about government assistance arrangements including
the following:
-
The types of arrangements;
The accounting for government assistance; and
Their effect on an entity’s financial statements.
What is Included in the Reporting?
• Information about the nature of the assistance, including the following:
-
The value of the government assistance awarded, an the amount expected to be awarded, to the
extent practical.
A general description of the significant categories and the related accounting policies adopted; or
The method applied to account for government assistance.
•
Which line items on the balance sheet and income statement are affected by government
assistance and the amounts applicable to each line item.
•
Significant terms and conditions of the agreement, including commitments and
contingencies.
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TAX CREDITS AND INCENTIVES UPDATES
FASB Topic 832 (cont’d)
Issues Identified During Comment Period
• Materiality and Scope
-
•
Topic 832 requires a company to disclose material programs.
Materiality threshold is largely determined by the company and its external audit.
Refer to guidance published in Topic 235.
Confidentiality
-
Is any of the information contained in the Significant Terms and Conditions of the reporting
that companies may consider confidential?
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TAX CREDITS AND INCENTIVES UPDATES
FASB Topic 832 (cont’d)
Effective Date and Initial Reporting
• Implementation Timeline
-
•
Comment period ended February 10, 2016.
During June 8, 2016 meeting, FASB Board “re-deliberated” the issues around scope, disclosure and
restrictions.
Effecting all reporting dates after the effective date (to be determined).
Initial Reporting
-
Government assistance contracts existing at the effective date.
Government assistance contracts entered into after the effective date.
Retrospective application is permitted.
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TAX CREDITS AND INCENTIVES UPDATES
Delaware
•
New Economy Jobs Tax Credit Reinstated (had expired after 2013)
-
•
25% to 40% withholding tax credit; creation of 50 new jobs ($100K salary) or 200 new or retained
jobs ($70K salary).
R&D Tax Credit (S.B. 200), effective January 1, 2016
-
Credit amount increased.
Unused credit now refundable; no longer subject to 15 year carryforward.
50% annual limitation and statewide $5 million annual cap removed.
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TAX CREDITS AND INCENTIVES UPDATES
Illinois
•
EDGE Income Tax Credit Expires December 31, 2016
•
Department of Commerce and Economic Opportunity certified 49 “new” Enterprise Zones
effective January 1, 2016.
•
Established Illinois Business and Economic Development Corporation during 2016
-
Public/private entity to lead all new business attraction efforts.
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TAX CREDITS AND INCENTIVES UPDATES
Louisiana
•
Executive Order JBE 16-26 – Changes to Claiming Industrial Tax Exemption Program
(effective June 2016)
-
•
No more exemptions on “miscellaneous” capital additions.
Requires local taxing jurisdiction approval.
Requires job creation commitment.
Percentage of abatement and term of exemption are variable up to 100% for 10 years.
Senate Bill 6 – Limits refund of Tax Credit for Local Property Taxes Paid on Inventory
-
Effective for returns filed on or after July 1, 2016 the refundable portion of the credit may be
limited and part of the credit would be carried forward for five years.
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TAX CREDITS AND INCENTIVES UPDATES
Pennsylvania
•
Relocation Assistance Capital Program
-
•
Created Manufacturing and Investment Tax Credit
-
•
Budget impasse resulted in delay of 2015 awards.
Gov. Wolf announced 2015 awards will be released (incrementally).
Commonwealth is not accepting new applications.
Available starting July 1, 2017.
Credit is based on new job creation and is worth up to 5% of increase in annual payroll.
Credit applied against 100% of all tax bases.
Must make application to DOR.
$4 million annual allocation for each fiscal year after June 30, 2017.
Created Data Center Sales Tax Refund
-
Available starting July 1, 2017.
Total refunds capped at $5 million.
Minimum investment of $25 million - $50 million (depending upon county population of project).
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TAX CREDITS AND INCENTIVES UPDATES
Rhode Island
•
Qualified Jobs Tax Credit
-
•
Base tax credit of $2,500 per new full-time job per year for up to 10 years.
May be increased up to $7,500 per new full-time job per year for up to 10 years.
Must create at least 10 net new full-time jobs.
Credit may be sold, refunded or carried forward.
Rebuild Rhode Island Tax Credit
-
Income tax credit used to close financial gap for expansion projects involving investment in real
property.
Maximum credit of $15 million per project limited to 20%-30% of total project cost.
Qualified project may also receive sales tax exemption.
Project must be at least 25,000 sq. ft., involve 25 full-time jobs and invest $5 million.
Credit may be sold, refunded or carried forward.
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TAX CREDITS AND INCENTIVES UPDATES
Wisconsin
•
Act 55 took effect January 1, 2016 – Created Business Development Tax Credit Program
-
New tax credit program replaces Economic Development and Job Creation Tax Credit programs.
Refundable income tax credits available for:
- Job creation
- Capital investment
- Job training
- Headquarters projects
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EMPLOYMENT TAX UPDATES
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EMPLOYMENT TAX UPDATES
•
FUTA Credit Reduction – To Be Announced after November 10 repayment deadline
-
U.S. Dept. of Labor previously announced potential impacted jurisdictions in August 2016,
including California, Connecticut, Ohio, and Virgin Islands.
•
2017 Social Security Wage Base Update – $127,200
•
Workforce Mobility Legislation
•
Information Reporting Deadline Change
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WORKFORCE MOBILITY LEGISLATION
•
H.R. 2315, The Mobile Workforce State Income Tax Simplification Act passed the House
without amendment on September 21, 2016.
•
Imposes a 30 day nationwide de minimis threshold for withholding and personal income
tax
-
“(Sec.2) This bill prohibits the wages or other remuneration earned by an employee who performs
employment duties in more than one state from being subject to income tax in any state other
than: (1) the state of the employee's residence, and (2) the state within which the employee is
present and performing employment duties for more than 30 days during the calendar year.”
•
S. 386 – Pending in the Senate Committee on Finance (identical to H.R. 2315).
•
Current State Treatment Overview: In general, an employer must withhold for state
income tax the moment a worker enters a state to perform services. Various state rules
incorporate limitations including, but not limited to: de minimis triggers, reciprocity
rules, no state tax, etc.
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INFORMATION REPORTING AND DEADLINE CHANGE
•
REMINDER!
•
Protecting Americans from Tax Hikes Act (“PATH Act” - December 18, 2015).
•
Forms W-2/W-3 – New SSA filing deadline is accelerated to January 31, 2017.
•
Forms 1099-MISC – If Box 7 nonemployee compensation is included the new accelerated
IRS filing deadline is January 31, 2017.
•
Other Form 1099 types maintain prior filing deadlines.
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PROPERTY TAX UPDATES
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PROPERTY TAX UPDATES
Personal Property Tax: Phase Outs and Exemptions
•
Michigan
-
•
Indiana
-
•
Proposal 1 (2014) “Small Business Exemption” – Businesses or related entities with a true cash
value of less than $80,000 in a taxing jurisdiction can be granted an exemption from personal
property tax if they annually complete and file an affidavit prior to February 10th.
MCL 211.9 “Eligible Manufacturing Personal Property (EMPP)” – Beginning in 2016, eligible personal
property used in industrial processing and direct integrated support of manufacturing will be
phased out from taxation until all EMPP is entirely exempt by 2023. The plan also created a State
Essential Services Assessment to offset some lost revenue, resulting in an additional annual filing
and payment requirement due by August 15th. (MCL 211.1057).
SB 436, Section 3 “Personal Property Exemption” – Provides a personal property tax exemption for
businesses with less than $20,000 total cost in a county. Taxpayers must file a notarized
certification annually prior to May 15th.
Kentucky
-
KRS 132.200(16) “Property Subject to State Tax Only” – A 2014 Kentucky Tax Board ruling
expanded an exemption on machinery inventory held by a retailer to include “other equipment” in
addition to the intended farming equipment.
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PROPERTY TAX UPDATES
Agency & Representation Requirements
•
North Carolina
-
•
Florida
-
•
17 NCAC 11 .0216 – 2016 amendment clarifies requirements surrounding representation in front of
Property Tax Commission. Businesses must be represented by an attorney, with certain exceptions
for officers and member-managers.
Statute 194.034 – As of July 1, 2016, petitioners to the Value Adjustment Board must be
represented by a Florida attorney, real estate appraiser or broker, or a CPA, if not represented by
an employee of the taxpayer.
California (Los Angeles County)
-
County Code 2.165 - Beginning in 2013, tax agents must be registered with the Board of
Supervisors.
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PROPERTY TAX UPDATES
Real Property Tax: Significant Trends and Cases
•
Indiana, Michigan, New York, Ohio, Kansas, Alabama
-
•
“Dark Stores” – In recent years there has been increased scrutiny on the use of “Dark Stores”
(generally vacant big-box retailers) as comparable sales in assessment appeals. The theory is that
a vacant “Dark Store” is a better indicator of the fee-simple value of property since it is not
encumbered by a lease. This issue has been exacerbated further by the decline of brick and
mortar retailers as consumers move towards online commerce.
New Jersey, Pennsylvania, Illinois
-
“Charitable Purpose Exemptions” – In several states across the U.S. there has been increased
activity in challenging exemptions of real property for charitable purposes. Many states have
implemented new tests for obtaining exemptions or are considering alternative methods of
taxation such as PILOT agreements or fixed unit fees. Some cases of significance include: Fields v.
Princeton University (NJ), AHS Hospital Corp. v. Town of Morristown (NJ), Provena Covenant
Medical Center v. The Department of Revenue (IL), Mesivtah Eitz Chaim of Bobov, Inc. v. Pike
County Board of Assessment Appeals (PA).
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CLOSING COMMENTS AND CONCLUSION
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CLOSING COMMENTS
•
Income/Franchise Tax – Connecticut and Louisiana legislation, market-based sourcing,
transfer pricing, related party expense addbacks and NOLs.
•
Sales and Use Tax – Click-thru nexus, affiliate nexus, economic nexus, use tax reporting,
SaaS, cloud computing and digital goods.
•
Tax Credits and Incentives – Financial reporting, and Delaware, Illinois, Louisiana,
Pennsylvania, Rhode Island and Wisconsin legislation.
•
Employment Tax – Workforce mobility legislation, and information and reporting deadline
change.
•
Property Tax – Personal property tax phase-outs and exemptions, agency and
representation requirements, and real property trends and cases.
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CONCLUSION
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SPEAKER BIOGRAPHIES
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BIOGRAPHY
EXPERIENCE SUMMARY
Mariano Sori is a partner in BDO’s State & Local Tax services practice. He has more than 27 years of state
tax consulting experience within a public accounting environment and concentrates on income and
franchise tax issues such as jurisdiction to tax, state tax base modifications, apportionment of income,
business/non-business income, unitary taxation, gross receipt taxes, allocation of partnership items, and
state filing options.
Mariano focuses on performing state tax diagnostic reviews designed to provide businesses with an
assessment of their state tax position, including the identification of refund and prospective filing
opportunities and the reduction of exposure in multiple jurisdictions. In addition, Mariano assists
Mariano Sori, CPA, JD businesses in designing and implementing structural enhancements in order to generate long-term state tax
Partner, State and Local reductions.
Tax
[email protected]
Direct: 312-616-4654
Mobile: 815-341-2242
330 N. Wabash
Suite 3200
Chicago, IL 60611
Tel: 312-856-9100
Fax: 312-856-1379
www.bdo.com
Mariano consults on all aspects of state income tax, including participating in mergers and acquisition
transactions, due diligence reviews, representation on state tax controversy matters, and assisting
companies with state tax compliance and state tax accrual reviews. He has worked with Fortune 1000 and
mid-size companies in industries such as manufacturing, retail, consumer services, financial services, real
estate, technology, and transportation.
PROFESSIONAL AFFILIATIONS
American Bar Association
American Institute of Certified Public Accountants
Illinois CPA Society
EDUCATION
J.D., Law, IIT-Chicago Kent College of Law
B.S., Accounting, Indiana University
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BIOGRAPHY
Steve has more than 25 years of experience in state and local taxation and leads the Western Region’s
sales and use tax and property tax consulting practices.
Prior to joining BDO, Steve worked for the California State Board of Equalization for 10 years as a Senior
Tax Auditor in Silicon Valley. During Steve’s tenure with the Board, he was responsible for conducting sales
and use tax audits on a wide variety of industries including but not limited to retailers, wholesalers,
construction, life science and Fortune 500 manufacturers. Steve was also an instructor for the Board’s
audit staff sales tax continuing education training and update classes.
Steve Oldroyd, CPA
Manging Director, State
and Local Tax
[email protected]
Direct: 408-352-1994
Mobile: 408-506-7318
After leaving the Board, Steve worked several years in industry and public accounting, holding positions
equivalent to Director of State and Local Taxes. Steve’s management experience includes a large specialty
retailer, a Fortune 100 computer manufacturer, and a Big Four accounting firm.
Steve has been involved with many M&A due diligence projects and has provided valuable consulting advice
to his multi-state clients. He has also been able to identify, document, and secure millions of dollars worth
of sales/use tax refunds through a variety of reverse audit techniques and has extensive experience in
successfully defending multi-state sales and use tax audits. Steve has spoken before numerous industry,
professional and taxpayer groups.
BDO USA LLP
50 W San Fernando St.
Suite 200
San Jose, CA 95113
Tel: 408-278-0220
Fax: 408 278-0230
www.bdo.com
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BIOGRAPHY
EXPERIENCE SUMMARY
Tim Schram is a managing director and one of the national leaders of BDO’s Credit and Incentive
practice. Tim has over twenty years of experience negotiating for state and local incentive packages on
behalf of clients. Tim has successfully assisted clients secure millions of dollars’ worth of incentives,
through programs such as: sales tax sharing agreements, cash grants, property tax abatements, utility
rate reductions and refundable income tax credits. Tim has worked with clients representing a number
of industry sectors and is one of BDO’s national leaders for the Food & Beverage industry group.
Prior to joining BDO, Tim was a Managing Director and founder of Grant Thornton’s Credit and Incentives
practice. Tim helped lead a national practice of over a dozen Credit and Incentive professionals. Tim
was also previously a supervisor in KPMG’s state and local tax practice focusing on credits and
incentives.
Tim Schram
Managing Director, State
and Local Tax
Tim is a member of IAMC, the American Institute of Certified Public Accountants, the Illinois Society of
Certified Public Accountants, and the Institute of Professionals in Taxation. Tim is a recognized leader in
the area of state and local incentives. As such he is a regular speaker and contributor to articles for
organizations such as TEI, ITP, Chicago Tax Club and CCH. Tim is also an Editorial Advisory Board Member
representing credits and incentives for the Journal of State Taxation.
[email protected]
Direct: 312-730-1276
Mobile: 312-907-3765
PROFESSIONAL AFFILIATIONS
American Institute of Certified Public Accountants CCH
Chicago Tax Club
Journal of State Taxation.
IAMC
Illinois Society Of Certified Public Accountants Institute Of Professionals In Taxation
ITP
TEI
330 N. Wabash
Suite 3200
Chicago, IL 60611
Tel: 312-856-9100
Fax: 312-856-1379
www.bdo.com
EDUCATION
B.S., Finance, Indiana University
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BIOGRAPHY
EXPERIENCE
Rob Kaelber is a managing director in BDO’s STS Employment Tax practice. He has 17 years of employment
tax consulting experience within a public accounting and national tax consulting environment, and
concentrates on employment and payroll tax issues such as multistate taxation, audits and controversy,
expense reimbursement and accountable plans, fringe benefits, M&A and reorganizations, due diligence,
and employee versus independent contractor classification.
Rob consults on all aspects of payroll and employment tax, and has worked with Fortune 1000 and mid-size
companies in industries such as manufacturing, retail, consumer services, financial services, technology,
healthcare, and transportation.
Robert Kaelber
Manging Director,
Employment Tax
PROFESSIONAL AFFILIATIONS
American Payroll Association
Admitted to Bar in New York and Florida
[email protected]
Direct: 614-573-7802
Mobile: 404-272-3073
EDUCATION
J.D., Washington & Lee University School of Law
B.A., The Ohio State University
BDO USA LLP
300 Spruce Street
Suite 100
Columbus, OH 43215
Tel: 614-488-3126
Fax: 614-488-0095
www.bdo.com
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BIOGRAPHY
EXPERIENCE
Dorothy is a Principal in BDO Chicago’s State and Local Tax Practice and serves as the Chicago Property
Tax Leader. She recently joined the firm in March of 2016 and has over 20 years of experience in state
and local taxation, specializing in property taxes. Prior to joining BDO, Dorothy was the National
Property Tax Leader at True Partners Consulting, where she serviced clients for 10 years. She was
previously a Senior Manager in the National Property Tax practice at Deloitte after their acquisition of
the Arthur Andersen Tax practice. Prior to Deloitte, Dorothy spent over eight years with Arthur
Andersen’s Chicago-based State and Local Tax Practice.
Dorothy Radicevich
Principal, State and Local
Tax
[email protected]
Direct: 312-730-1364
Mobile: 312-550-7162
330 N. Wabash
Suite 3200
Chicago, IL 60611
Tel: 312-856-9100
Fax: 312-856-1379
www.bdo.com
INDUSTRY FOCUS
Dorothy has significant industry experience in manufacturing and distribution, telecommunications, and
energy. She has managed personal and real property contract tax services engagements for large
corporations including the compliance, tax bill payment, real estate, incentive, appeal, and
negotiations functions. Dorothy has also performed real and personal tax diagnostics on behalf of
Fortune 500 and other large companies and has managed property tax engagements involving
obsolescence studies.
Dorothy was actively involved in a firm-wide property tax methodology team, and participated in the
ongoing development of process methodology utilized to ensure quality and efficiency in all property
tax engagements performed by the firm.
PROFESSIONAL AFFILIATIONS
Member- Institute for Professionals in Taxation
EDUCATION
B.S., Accountancy, Northern Illinois University
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BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to
a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active
involvement of experienced and committed professionals. The firm serves clients through 41 offices and more than 400 independent alliance
firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multinational clients through a global
network of 1,204 offices in 138 countries.
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee,
and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the
BDO Member Firms.
www.bdo.com
To ensure compliance with Treasury Department regulations, we wish to inform you that any tax advice that may be contained in
this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding taxrelated penalties under the Internal Revenue Code or applicable state or local tax or (ii) promoting, marketing or recommending to another
party any tax-related matters addressed herein.
Material discussed in this publication is meant to provide general information and should not be acted on without professional advice tailored to
your individual needs.
© 2013 BDO USA, LLP. All rights reserved. www.bdo.com
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