Sales Tax Treatment of Internet Commerce

TAXATION

State and Local Taxation

Sales Tax Treatment of Internet Commerce

By Chaim V. Kofinas

New York State recently issued an advisory opinion, TSB-A-03 (5) S, regarding the sales tax treatment of Internet commerce. In this opinion, the state took a pragmatic approach while asserting its ability to assess a tax.

A Delaware corporation (XYZ), with its principal place of business located outside of New York State, is a provider of online integrated database services that are maintained by two mainframe information systems located outside of New York. Subscribers to the database service are issued passwords that allow them access to the database. (Tax research providers such as CCH and RIA operate in an analogous fashion.) According to the advisory opinion, XYZ charges a set monthly fee based on the number of passwords issued. In addition, because the database can be accessed anywhere in the world through an Internet connection, it is virtually impossible for XYZ to identify the location of its users. TSB-A-03 (5) S assumes that this type of service is subject to New York State sales tax, presumably as the furnishing of an information service, if the service is delivered to users located in New York. This leads to the question: How does XYZ document the out-of-state and in-state delivery of its service? Charges for the in-state delivery of the service will be subject to New York State and local sales and use taxes.

The opinion acknowledges that if a subscriber buys multiple passwords and issues them to its employees located outside New York, then the fee for this service should not be subject to New York State sales tax. The issue becomes one of determining the correct mechanics for documenting the out-of-state usage. The opinion states that an exempt use certificate with a statement regarding the out-of-state employees is not correct, as this is neither an exempt use nor an exempt service. Because this is an electronically provided service, there is no “ship to” address on the invoice for XYZ to use in determining taxation. Instead, the opinion advises that XYZ obtain a statement from each of its subscribers that provides a detailed list of where the employees using the passwords are stationed or located. TSB-A-03 (5) S further advises that these letters, like exemption certificates, must be kept for at least three years, and must be updated as the facts change.

Although helpful, TSB-A-03 (5) S does not provide comprehensive guidance. It does not provide a positive statement that these “statements” will be honored in the case of an examination. The advisory opinion is specific in requiring a detailed statement of where users are located. In real life, however, a departure from the information provided may make such a statement worthless. For example, the advisory opinion does not address situations where the subscriber’s employees work from different locations on different days, such as telecommuters or traveling salespeople. New York could assert that partial usage of a password in New York State causes the fee for the service to be taxable. Such a conclusion is problematic, however, because it could result in double taxation if other states have a taxing scheme similar to New York’s.

Chaim V. Kofinas, CPA/PFS, is a tax manager with Wiss & Company LLP, Livingston, N.J.