Historically, the sales tax has not been extended to services, for ease of administration and a policy against taxing labor.Economic activity is shifting toward the service sector and is eroding the sales tax base relative to total consumption expenditures1960-1991: Of personal consumption expenditures, services increased from 26 to 42% and expenditures for tangible goods fell from 60 to 44%. States have begun expanding the sales tax in selected services
No, but in CT
No – In CT, but not MN
Taxing ServicesPresented By Joseph Gaouette
Goals of this Presentation• To review how courts assess whether a service falls within the confines of a state’s sales and use tax • What is the service that the sale involves? • Why does that service fall within the state statute? • What can we learn about how states define “services” within the confines of the sales and use tax?
Sales Tax – Child of theDepression• “With traditional sources of revenue, such as income and property taxes, providing lower and lower yields, the states turned to a new form of financing basic functions – the sales tax – as a desperation measure.”• What was the world like in the 1930’s?• How has the world changed since the 1930’s?• Has the sales tax kept up with this change?
Think Tangibility • Throughout this presentation we want to think that the sales tax was built out of an industrialized society • Think about putting the square peg of “services” into the round hole “tangible personal property.”
SECTION 1: REPAIR, ALTERATION, ANDSERVICING OF TANGIBLE PERSONALPROPERTY
Covington Pike Toyota, Inc. v.Cardwell (Tenn. 1992)
Covington cont.• SERVICE: the sale of extended warranty contracts for repair services• STATUTE:• (1) Taxable retail sales shall include: (iv) The performing for a consideration of any repair services…• (2) Exempts from sales tax any replacement parts or goods provided under warranty]. (refer to p. 681 for more info)• Does the service fall within the statute?
Let the taxable event lead us• “Under the statute, ‘the taxable event is the rendering of repair services in Tennessee.’ ”• “Not the future and uncertain prospect of having repair services performed in Tennessee.”• “The words ‘performing’ and ‘installing,’ taken in their natural and ordinary sense, mean the carrying out of physical acts.”• Why does the emphasis on the carrying out of physical acts?• What outcome do we expect for the taxpayer?
Taxpayer wins! • Court determines that "performing" does NOT include the act of entering into a contractual commitment to provide in the future and on a contingent basis repair services. The taxable activity is a physical activity. • Strictly construes "performing.”
The State Strikes Back • In 1991, Tennessee enacted a statute expressly making “charges for warranty or service contracts” taxable. • What have we learned so far about how states define services?
Section 2: Computer, DataProcessing, and InformationServices
Quotron Systems Inc. v. Limbach • SERVICE: Providing price information on stocks and commodities to subscribers via a computer terminal • STATUTE: “Automatic data processing” – “processing of others’ data, including keypunching or similar data entry services together with the verification thereof, or providing access to computer equipment for the purpose of processing data” • What is the likely outcome?
Hold That Thought • Let’s review these cases where taxpayers won: • PNC Bank, Ohio v. Tracy – Taxpayer wins! – payments made by a bank to a provider of credit card authorization services did not constitute the purchase of taxable ADP and computer services • Community Mutual Ins. Co. v. Tracy – Taxpayer wins! – litigation support services are professional legal services to which data processing and computer services were only incidental
Quotron Loses • Court rejects Quotron’s argument that their services fall outside the definition of ADP because the services are only taxed when the vendor allows access to equipment to process customer data. • Remember: The tangible results of these services are generally taxable as sales of tangible personal property
Wait! Telecommunicationservices? Remember: The tangible results of these services are generally taxable as sales of tangible personal property • How are telecommunication services tangible? • What if there was another exception?
Telecommunications Services • Definition: Two-way, electromagnetic communications • Majority of states impose sales tax on telecommunications services • Consistent with utility services exception
Goldberg v. Sweet (176-186) • SERVICE: Telephone communication • STATUTE: Taxes the origination or termination of an interstate phone call charged to a service address within the State • Taxpayer more questions how such taxation frustrates interstate commerce – Commerce Clause • Outcome?
Taxpayer loses • “It is not a purpose of the Commerce Clause to protect state residents from their own state taxes.” • This tax burdens in-state taxpayers who presumably are “able to complain about and change the tax through the Illinois political process.” • Really?
Response?“Interstate commerce may be required to contribute to the costof providing all government services, including those servicesfrom which it arguably receives no direct benefit” – p. 183Bottom line: IL can tax even if it cannot be proved that theyprovided services for the commerce they are taxingTakeaway: Remember that whatever the outcome of a tax ontelecommunications it has to come back to use in the state
Prepaid Calling Cards • IL gets CT and SD together to talk prepaid calling cards • SD thinks: Tax the card if purchased in SD wherever the card is used • CT thinks: Tax the card if used in CT • IL thinks: Tax the card in IL unless retailer can show that cards are not used in the State
Are prepaid calling cardstaxable? • 3 Questions: • Is this a sale of tangible personal property, services, or intangible property? • Taxable at time of purchase or when the card is used? • Is the tax base the amount charged to the retailer or to the consumer?
Private Letter Ruling No. 95-0431,IL Dept of Rev. 1995• Tax base is the amount charged to card purchaser at point of sale for the taxable service provided (full amount of the card)• When calling cards are sold in IL, there is a presumption that calls originate or terminate in IL.• Burden is on retailer to show charges are exempt
Ruling No. 95-10, CT. Dept of Rev.1995• Not taxable to consumer at time of sale• Tax is due on the telecommunications services when a phone card is used to make a call both originating and terminating in Connecticut or originating in Connecticut and terminating outside of Connecticut.• Telecommuications provider must debit the amount of tax from the card at the time of the call.
Sales Tax Newsletter,ND State Tax Commissioner 1996• Selling prepaid calling cards are sales of personal tangible property.• Sale is taxable in ND, regardless of state where calls originate or terminate.• Majority of states currently use this method.
Telecommunication Services inConjunction with Other Services• Where telecommunications service is needed by a company engaged in the business of providing computer and data processing services in order to provide such services to its customers, the company is using the telecommunications services, and it is not purchasing such service for resale to its customers. Ruling 91-16, CT Dept. of Rev. 1991
Takeaways• States are generally taxing more services• Because the services must be statutorily defined, there is litigation surrounding whether or not a particular activity meets the statutory definition.• Courts are usually favorable to statutes that outline the taxation of tangible personal property
Policy Decision: Services• In this exercise one team represent the interest of people who do not want the MN sales tax to expand to more services and the other side does want to sales tax to include greater services.• Each side has two minutes to prepare a 30 second to one minute statement arguing for your position.