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Nebraska: State is not (directly) taxing “the cloud”

The Nebraska Department of Revenue (DOR) updated its Nebraska Sales and Use Tax Guide for Computer Software (Software Guide) late last month which provides guidance regarding the taxation of cloud computing in the state. The DOR originally issued its Software Guide in July 2011.

In Nebraska, gross receipts from the sale, rental, lease, license, or transfer of prewritten or custom computer software are subject to sales tax. The sales tax is determined without regard to the seller’s method of delivery to the purchaser. Also, training on the use of software is a taxable service if performed by the seller of the software, and regardless of the nature of the seller. Maintenance or service contracts and charges for installing computer software are taxable. 

“Cloud Computing,” per the Software Guide, is “[s]ervices which allow customers to access and use computer software, servers, operating systems, databases, and other computing resources via the Internet. Cloud computing includes services known as Software as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (IaaS).” 

These cloud computing service charges are tax exempt sales. More specifically, the DOR stated:

Charges for services which allow customers to remotely access software applications, operating systems, servers, and other network components via the Internet or other online connections are not taxable. This is true regardless of whether the software, hardware or network components are located in Nebraska or outside the state.

The DOR’s stance does not necessarily make this a tax exempt (or tax effect free) transaction for all. The service provider will be responsible for paying sales or use tax on its purchases of software, hardware and network components if these items are used in Nebraska. Thus, while the transaction between the user of cloud services and the service provider may be tax free to the user, the service provider will be assessed and will likely build in the sales and use tax cost of certain components of providing such cloud services to its users.

Indiana: DOR ruling clarifies state tax nexus issue (or does it?)

The Indiana DOR recently issued Revenue Ruling #2013-03 IT (the “Ruling”) addressing whether a taxpayer’s (Taxpayer) storage of its clients' advertising catalogs at theTaxpayer's Indiana facilities creates nexus such that the taxpayer's clients will have an income tax filing and reporting requirement in Indiana. Stated differently, the Ruling addresses whether a vendor’s presence and activities in the state, if such activities are limited to only the storage and distribution of store catalogs by a third-party vendor, may create income tax nexus for its clients.

The facts of the Ruling are as follows:

  • Taxpayer is located in Indiana
  • Out-of-state retailers store catalogs at Taxpayer’s facilities in Indiana for some period of time prior to distribution
  • The Taxpayer distributes, from Indiana, the out-of-state retailer’s catalogs to recipients throughout the United States, including recipients located in Indiana


Under Indiana Code 6-3-2-1(a), a tax is generally imposed on the adjusted gross income of every nonresident person on the part of their adjusted gross income derived from sources within Indiana. For corporations and nonresident persons, “adjusted gross income from sources within Indiana” means:

  1. Income from real or tangible personal property located in this state;
  2. Income from doing business in this state; 
  3. Income from a trade or profession conducted in this state;  
  4. Compensation for labor or services rendered within this state; and 
  5. Income from stocks, bonds, notes, bank deposits, patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other intellectual property to the extent that the income is apportioned to Indiana under this section or if the income is allocated to Indiana or considered to be derived from sources within Indiana under this section. Indiana Code 6-3-2-2(a).


The DOR then focused on the second part of the meaning of “adjusted gross income from sources within Indiana” and “doing business” in the state. The DOR noted that while “doing business” is not defined under the statute, the Indiana Administrative Code defines it under 45 I.A.C. 3-1-1-38.

Sec. 38. Doing Business. For apportionment purposes, a taxpayer is “doing business” in a state if it operates a business enterprise or activity in such state including, but not limited to:

  1. Maintenance of an office or other place of business in the state
  2. Maintenance of an inventory of merchandise or material for sale distribution, or manufacture, or consigned goods 
  3. Sale or distribution of merchandise to customers in the state directly from company-owned or operated vehicles where title to the goods passes at the time of sale or distribution 
  4. Rendering services to customers in the state 
  5. Ownership, rental or operation of a business or of property (real or personal) in the state 
  6. Acceptance of orders in the state 
  7. Any other act in such state which exceeds mere solicitation of orders so as to give the state nexus under P.L. 86-272 to tax its net income

The DOR focused on the only business activity in the state of Taxpayer’s clients – the storage and presence of the clients’ catalogs. In reviewing these activities, the DOR reasoned that the mere presence of the catalogs in the state do not, in and of themselves, generate any income for the Taxpayer, nor does the presence of the catalogs constitute “doing business” under the Indiana Administrative Code’s definition. Based on these facts and analysis, Taxpayer’s clients do not appear to have adjusted gross income derived from sources within Indiana. As such, the DOR concluded, the clients do not have any Indiana income tax filing requirement from the presence of their catalogs in the state.

The DOR came to a similar conclusion (that there was insufficient nexus) for sales tax purposes in Revenue Ruling #2013-08 ST under the same facts.

California: “SpaceX bill” would exempt private space flight equipment from personal property taxes

Legislators and state tax officials are proposing to exempt certain private space flight equipment from personal property taxes. Such proposed exemptions are in response to a Los Angeles County personal property tax assessment on SpaceX, which designs, manufactures and launches advanced rockets and space craft.

In general, the California tax code taxes all tangible personal property, subject to certain exceptions. One exception is for business inventories, which include “goods intended for sale or lease in the ordinary course of business and shall include raw materials and work in progress with respect to such goods…” (Section 129 of the California Revenue and Taxation Code). The issue is whether certain space flight equipment qualify for such business inventory exemption because such equipment is not “sold” in the general sense.

The State Board of Equalization legal opinion

The State Board of Equalization (SBOE), which administers California's sales and use, fuel, alcohol, tobacco, and other taxes, released its legal opinion on Dec. 24, 2013, in response to a request from a space flight company about the applicability of the business inventory exemption to the space transportation equipment it fabricates for its customers.

The SBOE explained that in order to qualify for the business inventory exemption, goods must be intended for sale or lease in the ordinary course of business. Typically, a sale is defined as the passage of title to the goods from the seller to the buyer in exchange for the contract price. However, the SBOE recognized that the space flight industry is heavily regulated by federal statutes and regulations, “creating a unique market in which the technical sale of goods is constrained to make transfer to title of space flight equipment extremely difficult, if not practically impossible.” Consequently, the space flight company does not structure its contracts as a typical sale or lease of the space transportation equipment to its customers, but does relinquish ultimate control over the equipment at launch to a federal Range Safety Officer at the launch site.

Given this regulatory context, the SBOE determined that the company’s relinquishment of ultimate control over the space transportation equipment to a federal authority at the launch site in exchange for consideration provided by the company's customer is sufficient to constitute a “sale” for purposes of meeting the business inventory exemption. However, the SBOE explained in its opinion that its views are advisory in nature and are not binding on any person or public entity.

SBOE proposed rulemaking change

Following the release of this opinion, the SBOE has proposed to amend property tax rule 133 governing the business inventory exemption to change the definition of "business inventory" to specifically include space flight property classified by federal law as defense articles, the control over which is relinquished by the owner upon launch.

The SBOE is in the process of analyzing public comments and holding hearings on the proposed rule.

Legislative reaction and proposed space flight personal property tax exemption

The California Assembly has also reacted to the personal property tax assessment on SpaceX and the SBOE legal opinion by approving a bill (AB-777), which would exempt personal property taxes on certain qualified property for use in space flight. The bill provides for categories of property that would be exempted, which would include, among other items, orbital space facilities, space propulsion systems, space vehicles, launch vehicles, satellites, space stations and rocket fuel. The bill only applies to companies whose primary business purpose is space flight activities. The proposed exemption would only be available for a 10-year period, beginning with the Jan. 1, 2013 lien date until, and including the Jan. 1, 2023 lien date.

Assembly Member Muratsuchi, one of the bill sponsors, explained in a statement that this bill was needed because there are new tax issues being raised “now that private companies like SpaceX and Virgin Galactic are building space rocket ships.” Muratsuchi believes “[w]ith this bill, California can incubate and grow this new industry and create thousands of good paying manufacturing jobs locally and statewide.”

According to legislative analysis, this bill would result in a revenue loss of about $1.1 million a year.

Now that the bill has been passed by the California Assembly, it moves on to the Senate. 

Click here to read the current text of AB-777. 
 
Click here to read the SBOE legal opinion. 
 
Click here to read a copy of the proposed revisions to the property tax rule business inventory exemption. 

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

David M. Kall
216.348.5812
dkall@mcdonaldhopkins.com

Susan Millradt McGlone
216.430.2022
smcglone@mcdonaldhopkins.com

Jeremy J. Schirra
216.348.5444
jschirra@mcdonaldhopkins.com

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.

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