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Michigan: Bill exempts vehicle trade-in value from sales tax on vehicle purchases

Businesses and individuals who have postponed trading in their used vehicles on new ones may be rewarded for their patience. Michigan consumers will no longer be taxed on the full sales price of new or used motor vehicles or recreational vehicles when a consumer provides a trade-in motor vehicle or recreational vehicle as part of the purchase price of a new or used motor vehicle or recreational vehicle, under a bill (SB 89) that was passed by the Michigan legislature and is expected to be signed by Governor Rick Snyder.

Senator Dave Robertson, the bill sponsor, explained that “Michigan is currently one of only six states—and the only Great Lakes state—that taxes the value of trade-ins. This unfair policy puts in-state businesses at a serious competitive disadvantage and costs Michigan consumers more in extra taxes.”

Phased-in exemption

The bill provides for a phased-in exemption up to the full agreed-upon value of the trade-in vehicle. Beginning on December 15, 2013, up to $2,000 of the agreed-upon value of the trade-in motor vehicle or recreational vehicle is exempted from sales tax when used as partial payment for the purchase of a new or used motor vehicle or recreational vehicle if such agreed-upon value is separately stated in the invoice, bill of sale or similar document given to the purchaser.

Beginning January 1, 2015, and each January 1 thereafter, the amount of such exemption will be increased by $500 each year until the exemption amount equals $14,000. Once the exemption amount exceeds $14,000, there will no longer be a limit on the amount of the exemption. However, such annual increases will stop if the recently enacted Medicaid expansion legislation is repealed.

Beginning November 15, 2013, the full agreed-upon value of a titled watercraft will be exempted from sales tax when used as partial payment for the purchase of a new or used titled watercraft if such agreed-upon value is separately stated in the invoice, bill of sale or similar document given to the purchaser.

After the Michigan legislature approved the bill, Governor Snyder stated in a written statement that “[t]his plan strikes a smart, fiscally responsible balance. The amount saved would be phased-in gradually, offering families some immediate tax relief while spreading out the impact on the state budget.”

Fiscal impact

The Michigan House Fiscal Agency (Agency) determined that the bill would reduce sales tax revenue for fiscal year 2013-2014 by an estimated $24.6 million, which would decrease revenue earmarked for schools by approximately $18 million. The Agency expects that the incremental $500 increase in the maximum trade-in exemption amount will reduce sales tax revenue by an estimated additional $6 million for fiscal year 2014-2015, and that each successive incremental increase in the trade-in exemption amount will reduce the sales tax revenue by more than the prior increment due to expected increases in the purchases and prices of vehicles over time. The Agency believes that the estimated annual cost of such trade-in exemption could be between $250 million and $450 million once the exemption is fully phased-in after 24 years.

Click here to read the full text of SB 89.

North Carolina: State added to growing list of states stipulating that married same-sex couples must file separately

On October 18, 2013, the North Carolina Department of Revenue (the Department) issued Directive PD-13-1 (the Directive). In the Directive, the Department stipulates that since North Carolina law does not recognize same-sex marriages as valid, such married couples cannot file a North Carolina income tax return using the filing status of married filing jointly or married filing separately.

The relevant law, North Carolina General Statutes § 51-1.2, provides that “[m]arriages, whether created by common law, contracted or performed outside of North Carolina, between individuals of the same gender are not valid in North Carolina.”

The Directive provides that if same-sex married couples file a joint federal tax return, these individuals must each complete a separate pro forma federal return for North Carolina purposes with the filing status of single or, if qualified, as head of household or qualifying widow(er) to determine the individual’s adjusted gross income (AGI). When filing electronically, each individual in the same-sex marriage must transmit their pro forma federal returns when filing each of their state returns with North Carolina.

The Multistate Tax Update will continue to follow developments in state tax law in the wake of the Court’s ruling in United States v. Windsor (striking down Section 3 of the Defense of Marriage Act (DOMA) on grounds that the federal interpretation of "marriage" and "spouse" to apply only to heterosexual unions is unconstitutional under the Due Process Clause of the Fifth Amendment), as well as Revenue Ruling 2013-17 (holding, in part, that: (1) “husband” and “wife” include an individual married to a person of the same sex if the individuals are lawfully married under state law, and the term “marriage” includes such a marriage; and (2) a marriage of same-sex individuals that was validly entered into in a state whose law authorizes the marriage of two individuals of the same sex even if the married couple is domiciled in a state that does not recognize the validity of same-sex marriages). These holdings have only begun their ripple effect throughout the United States at both the federal and state level. To be sure, a multitude of state legislation, rulings, guidance, and litigation will continue to ensue as a result. If you have questions on how these holdings or other developments may affect you or your business, please contact us.

Click here to read Directive PD-13-1.

Tennessee: Revenue Letter Ruling provides guidance on sales taxes applicable to certain cloud computing services

The Tennessee Department of Revenue (the Department) recently issued Revenue Letter Ruling #13-12 (the Ruling). In the Ruling, the Department addressed the application of the Tennessee Retailers’ Sales Tax Act (the Act) to various cloud computing services.

The taxpayer in the Ruling (Taxpayer) offers information technology infrastructure services to customers online. The services offered allow customers to access applications and platforms, server bandwidth and storage capacity without significant information technology capital investment. The Taxpayer does not own any data centers. It only uses large data centers and very small clusters of servers provided by affiliated companies. None of the centers or sites are located in Tennessee. In summary, the Taxpayer’s “cloud” computing services include remote storage and virtual computing.

The remote storage service allows customers to store, backup, retrieve, and maintain content data, applications and software on the Taxpayer’s servers. Customers can use this service at any time over the Internet using certain software development kits and a management console made available by the Taxpayer free of charge, but the customer may use the storage service without utilizing these tools. The customers retain ownership of the information uploaded to the Taxpayer’s servers.

The virtual computing service allows users to perform activities typically performed on a server, such as running application, monitoring computers and computer usage and hosting web domains. Customers tailor their service based on their computing needs and allocate sufficient processing and memory optimal for their operating system and applications the customer plans to use. Taxpayer provides its customers free application programming interfaces and software development kits. These forms of assistance are entirely optional to the customer. The customer can use either an open source operating system free of charge (and one that is freely available on the Internet) or opt to use a third-party operating system. Regardless of choice, the operating system runs on the Taxpayer’s servers and is not downloadable by the customer for the customer’s own use. The customer’s use of the operating system is only in connection with its use of the virtual computing services, and no licenses or software are sold by the Taxpayer.

The fee for each of the remote storage services and virtual computing services includes both a base fee, which is based largely on time and availability (e.g., like a monthly cell phone fee for a certain plan), and an incidental usage charge, which is based on the Taxpayer’s customer’s activity on the Taxpayer’s network. No fees were based on the use of the transmission infrastructure necessary to provide the services. Thus, “both the Taxpayer and its customers must obtain and pay their own telecommunications access and usage fees to their respective telecommunications service providers outside of and independent from the Taxpayer’s service transaction.”

In order to understand sales taxes in Tennessee, there are a number of definitions one must know. Under the Act, the retail sale in Tennessee of tangible personal property and specifically enumerated services is subject to sales tax, unless there is an applicable exemption. “Retail sale” is defined under the Act as “any sale, lease or rental for any purpose other than for resale, sublease or subrent.” “Sale” means “any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever of tangible personal property for a consideration.” “Tangible personal property” includes “property that can be seen, weighed, measured, felt, or touched, or that is in any other manner perceptible to the senses.” Tangible personal property further includes “prewritten computer software,” defined as “computer software, including prewritten upgrades, that is not designed and developed by the author or other creator to the specification of a specific purchaser.” However, the sale or use of intangible intellectual property is not subject to Tennessee sales and use tax unless stored on a tangible storage media.

One of the items explicitly taxable is “[t]he retail sale, lease, licensing, or use of computer software in this state, including prewritten and custom computer software...regardless of whether the software is delivered electronically, delivered by use of tangible storage media, loaded or programmed into a computer, created on the premises of the consumer, or otherwise provided.”

“Computer software” is “a set of coded instructions designed to cause a perform a task.” Computer software is “delivered electronically” if delivered “by means other than tangible storage media.”

Sales taxes are also applicable to retail sales of services specifically enumerated in the Act. One such service is the furnishing of “intrastate, interstate or international telecommunication services.” However, data processing is excluded from telecommunication services.

There are two ways in which non-enumerated services may be taxed. One such way that a nontaxable service or item may be subject to taxation is when charges for the nontaxable service or item are included in the sales price of a taxable good or service. The other way is where the service is intertwined with the sale of taxable tangible personal property.

Without going through the entire lengthy legal analysis contained in the Ruling, the Department ultimately ruled that none of the remote storage service, the virtual computing service or the Taxpayer’s fees were subject to Tennessee sales and use taxes. This finding was based primarily on the grounds that none of the non-customized software was subject to a fee, the noncustomized software was not sold to any customers, the Taxpayer was not providing telecommunication services, and the Taxpayer’s services or software were never embodied in or intertwined with a tangible medium that is by itself subject to Tennessee sales tax.

Note that letter rulings are binding on the Department only with respect to the taxpayer being addressed in the ruling.

Click here to read the text of Revenue Letter Ruling #13-12 and to read the Department’s legal analysis.

For additional information regarding these subjects or any other multistate tax issues, please contact:

David M. Kall

Susan Millradt McGlone

Jeremy J. Schirra

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.