Marketplace Fairness Act - Whether it Passes or Not Sales Tax Nexus is Complex Issue

The Senate passed Market Fairness Act ("MFA" or "Internet Tax") on May 6, 2013, but, the proposed legislation is languishing in the House. Will it pass? No one knows.

What we do know is whether MFA passes or not, sales tax nexus will remain a complicated issue. Additionally, states budgets are tight so they have been busy passing more aggressive nexus laws. Whether MFA passes or not, nexus will be an issue for the foreseeable future for businesses.

The worst time to find out that your business has nexus in a state is when a state is inquiring about the company's business activities. At this point your options are limited. When it comes to nexus, it is better to be proactive rather than reactive. For those who are proactive, there are voluntary disclosure programs that can limit the amount of the company's exposure by reducing the look back period, abate the penalty, and a few states abate some or all of the interest. Here are proactive action steps that businesses can take to protect themselves: 

Step One: Determine if you have nexus

If you answer yes to any of the following questions your business probably has nexus in the state.

Do you have employees who live in, or travel to, another state to make sales calls, perform training or installation services, or to make deliveries or repairs?

 

Do you own or lease any real or tangible property in another state such as an office, warehouse, retail store, equipment, machinery, etc.?

Do you maintain any inventory, whether consigned, stored, or carried by sales representatives in another state?

 

Do you use independent (non-employees) sales reps or manufacturer's reps or brokers to perform sale activities for your business in other states?   

 

Step Two: Taxable Sales 

If you have determined your company has nexus the next step is to figure out if what you sell is taxable. For companies that only sell tangible personal property this may be easy. For other companies it may be harder. 

Step Three: Determine your exposure.

If you determine that your business has nexus and you have taxable sales; you will need to determine the amount of the company's exposure. If you have never been registered or filed a tax return in a state than there is no statute of limitations. In theory, if a state finds you they can go back to the date you started doing business in the state. In reality States routinely go back seven to 10 years. Before you contact the state you need to determine company's exposure and course of action that works best for you.   

Step Four: Evaluate your options.

Once you have completed the first three steps it is time to choose a course of action that works best for you. If company's exposure is minimal and you don’t anticipate a lot of sales in the future, you may choose to do nothing. If the company's exposure is minimal; but,  you expect sales will grow in a state you may choose to do a normal registration and pay outstanding tax, penalty and interest. However if the company's exposure is significant then you will probably want to use a mitigation program like an amnesty or a voluntary disclosure agreement (VDA) to resolve the issue.

Summary
Nexus is and will be vitally important whether or not the MFA passes, and it pays to be proactive. When it comes to nexus, if you are not proactive, then you may be setting company up for large tax bill. This is what happens when a state finds businesses years later and asserts the company has nexus. When that happens the business may be subject to paying taxes plus penalties and interest. This is a tragedy because if business knew it’s nexus it a state it could have registered and its customers would have paid the tax. Do not hesitate to contact me at 954.599.5985 or klake@bpbcpa.com if you have any questions on Marketplace Fairness Act or sales tax nexus.

Bottom line, software that is downloaded electronically it is not subject to Florida sales tax

A license to use software that is downloaded electronically by the customer is a service transaction and is not subject to Florida sales tax, regardless of whether or not the software is customized or canned, provided it is not part of the sale of tangible personal property.

 

Additionally, a service agreement that covers the cost of maintaining, repairing, or replacing software that was electronically downloaded is also exempt. If your client or your company purchased electronically downloaded software during the last three years, they may be entitled to refund.

 According to Florida Technical Assistance Advisement (TAA) 10A-028, the license to use software that is downloaded electronically by the customer is a service transaction and is not subject to sales tax provided it is not part of the sale of tangible personal property.

FLORIDA STATUTES

Section 212.05, F.S., provides that the sale of tangible personal property is subject to tax. The term “sale” includes a license to use tangible personal property. See Section 212.02(15), F.S. Service only transactions, except those authorized for taxation by Chapter 212, F.S., are generally not subject to tax. When tangible personal property and services are a part of the same sale, the entire sales price is subject to tax. See Section 212.02(16), F.S. Software supplied on a tangible medium is taxable. Charges for services that are part of the sale of such taxable software are part of the sales price and are subject to sales tax.

Rule 12A-1.032, F.A.C., provides that a sale of customized software is a service transaction and is not subject to sales tax provided the customized software is not part of the sale of other tangible personal property. Likewise exempt is a sale that solely involves software, canned or customized, that is provided to the customer in an electronic format, as there is no conveyance of tangible personal property. Keep in mind that electronically accessed software is subject to Florida sales tax when sold as part of the sale of tangible personal property.

Section 212.0506, F.S., indicates that an agreement that covers the cost of maintaining, repairing, or replacing canned or prepackaged software (tangible personal property) is subject to sales tax, while an agreement that covers the cost of maintaining, repairing, or replacing customized software or software that was downloaded electronically is not subject to sales tax.

BOTTOM LINE:

Please know that a Technical Assistance Advisement under section 213.22, F.S. is binding on the Department only under the facts and circumstances described in the request.
Your client or your company's facts will determine whether or not a sale or purchase of software is taxable; but, the bottom line is if software is downloaded electronically it is not subject to Florida sales tax.