Some Sunshine in Vermont: Sales Tax on Cloud Computing Services

I recently authored an article in State Tax Notes entitled “Let the Sunshine In: The Age of Cloud Computing”, which describes the murky area of state taxation of cloud computing services.  On May 24, 2012, Vermont brought some sunshine to this cloudy area. 

Vermont Governor Peter Shumlin signed a bill that temporarily exempts charges for pre-written software accessed remotely.  This is knows as “software as a service” or “SaaS.” 

In particular, the legislation prohibits the Vermont Department of Taxes from assessing sales and use taxes on charges for SaaS.  This prohibition is for the period of January 1, 2007 through June 30, 2013.  The law also provides that any taxes paid during this period may be refunded, as long as the statute of limitations has not expired and the claimant provides proper documentation. The legislation would cause the abatement of any pending assessments for taxes on charges for SaaS during this period.

The new law does not affect the tax on digital products.  Thus, if a Vermont customer were to download software or music, the customer would be liable for the Vermont sales and use tax. 

In addition, the Governing Board for the Streamlined Sales Tax Agreement is scheduled to have a policy discussion regarding taxation of cloud computing at its meeting in August.  It is likely that more and more states will take up the issue of sales tax on the various types of cloud computing services.

Illinois Circuit Court Enters Written Order That Illinois Affiliate Nexus Law Is Unconstitutional

On May 11, 2012, Judge Robert Lopez Cepero of the Illinois Circuit Court for Cook County, entered a written order (“May 11 Order”) granting summary judgment to the Performance Marketing Association (“PMA”) in its challenge to the 2011 Illinois affiliate nexus statute.   The Court ruled that the Illinois law fails the “substantial nexus” requirement for state taxes under the Commerce Clause and violates the federal moratorium on state taxes that discriminate against electronic commerce under the Internet Tax Freedom Act (“ITFA”). The Court’s May 11 Order memorializes Judge Cepero’s ruling from the bench after oral argument on April 25, 2012, previously reported in our blog on April 26.(The May 11 Order is styled an “Amended Order,” because it addresses certain technical requirements of a local Illinois Supreme Court Rule not originally addressed in a written order issued by the Court on May 7, 2012.)

The Illinois affiliate nexus statute by its terms imposed an obligation to collect Illinois use tax on any out-of-state Internet retailer that enters into a contract with an Illinois Internet affiliate for a link on the affiliate’s website that connects Internet users to the e-retailer’s website, where the affiliate is compensated based on sales made by the retailer to such customers, and the total receipts by the retailer resulting from all such sales is in excess of $10,000. In striking down the law as unconstitutional, the Court concluded that such affiliate relationships are insufficient to create nexus and that, by failing the “substantial nexus” test, the statute is “facially invalid and unenforceable.” May 11 Order at para. 1.a.

The May 11 Order makes clear that the Defendant, the Director of the Illinois Department of Revenue, has 30 days from the date of the order, or until June 11, 2012, to appeal the ruling directly to the Illinois Supreme Court. The State is expected to appeal.

George Isaacson and Matt Schaefer of Brann & Isaacson represent the PMA in the case.

FTC Report outlines Consumer Privacy Framework, urges self-regulation

Following on the heels of the White House’s “Consumer Privacy Bill of Rights,” (recently discussed in this space), the Federal Trade Commission released its own final report on Consumer Privacy last month: “Protecting Consumer Privacy in an Era of Rapid Change, Recommendations for Businesses and Policymakers.” The issue of consumer privacy online continues to receive sustained attention from privacy advocates, policymakers and journalists (see, for example, the Wall Street Journal’s “What they Know” series), and this latest policy paper highlights a number of important areas for retailers.