Nov 302015

A state by state comparison of services subject to sales tax

While it is politically unpopular to raise sales tax rates, many states have found it possible to supplement lagging revenues by expanding the tax base – they make more types of goods and services subject to sales tax.

Whereas services used to be considered mostly tax exempt, that is no longer a safe assumption. States frequently tax services that are performed on tangible personal property such as contractor work or maintenance. Ongoing services such as repair contracts and extended warranties are also commonly subject to sales tax. The list of services subject to sales tax is ever expanding. Today, data processing, credit reporting, internet access and parking and storage are also services subject to sales tax in many states.

Services subject to sales tax

If you look at the chart for “general” services subject to sales tax it appears that most states tax services “generally”, but that doesn’t give you a complete picture. If you look at a less broad subset of services, in this case, janitorial services, you will see that the majority of states exempt it from sales tax (with multiple caveats.)

taxability of janitorial services

**Chimney cleaning exempt ***Janitorial or maintenance services performed on a casual-sale basis are not taxable. Janitorial services for the disabled may be exempt ****Nonresidential cleaning services, including janitorial services on a contract or fee basis, are taxable. Residential claning services are exempt. *****furnishing of cleaning services, including cleaning and renovation of furniture, capets and rugs is taxable. However the cleaning and restoration of misc. items other than furniture and structural claning are exempt provided certain conditions are met and the charge for each is separately stated. #Cleaning of a commercial or industrial building is taxable. Cleaning for individuals is exempt. ##Interior cleaning and maintenance service agreements of 30 days or more are taxable. ###Cleaning real property, such as windows, walls, and carpeting is exempt. Cleaning personal property, including furniture, rugs and draperies is taxable. ####However, cleaning personal property is taxable. ^Janitorial services does not include cleaning the exterior walls of buildings, septic tanks, special clean up jobs reqired by construction, fires, floods, etc., painting, papering, repairing, furnace or chimney cleaning, snow removal, sandblasting, or the cleaning of plant or industrial machinery or fixtures. ^^Routine and repetitive janitorial services exempt. Specialized cleaning of tangible personal property taxable, specialized cleaning of real property exempt. ^^^Generally, services for repair, alteration, or improvement of tangible personal property are taxable.

The take-away is that you will need to thoroughly understand what services your company performs and how they relate to the sale of any tangible property in each state in order to fully understand the sales tax implications. If you sell taxable services, you must register as a dealer to collect and report sales tax according to each state’s published rules.


Nov 302015

Sales taxes changed in Zip2Tax products for four states since November

In Alabama, tax rates changed for Randolph County.

In Colorado, tax rates changed for Winter Park.

In Louisiana, tax rates changed for Lafayette Parish.

In New York, tax rates changed for Chautauqua County and Jefferson County.

There were 10 states with ZIP code changes effective after November 2015 including the District of Columbia, Florida, Georgia, Indiana, Massachusetts, Minnesota, Mississippi, New Jersey, Ohio and Texas. A PDF document enumerating ZIP code additions and deletions can be made available upon request.

Angel Downs, Zip2Tax's ead tax researcher

Angel Downs, Zip2Tax’s lead tax researcher

Nov 272015

sales tax freeSouth Carolina reminds shoppers that Amazon orders will loose their sales tax free status as of Jan. 1, 2016.

As of New Year’s Day, South Carolina will become the 27th state to require sales tax be collected on Amazon orders. Amazon has long been aware that it will lose its sales tax free status. The deal the state’s legislature made back in 2011 with the retailer in exchange for in-state jobs expires after this month.

South Carolina expects to collect many millions of dollars once sales tax free Amazon shopping is a thing of the past. “We expect a significant increase in sales tax revenues,” said Rick Reames, state Revenue Director.

Amazon’s policy used to be to pull business out of states that tried to force it to collect sales taxes. South Carolina was among 10 states that gave Amazon a temporary tax reprieve in exchange for jobs and investment. In return, Amazon placed distribution centers in Lexington County and Spartanburg.

Even during the 4 1/2 years Amazon didn’t collect sales tax on South Carolina transactions, by law shoppers were still responsible for paying the tax not collected at the time of purchase. As per its compromise with the legislature, Amazon has e-mailed customers a yearly tally of what they’ve spent, reminding them they may owe the use tax on their income tax returns.

Even though Amazon did not share purchase information with the state’s department of revenue, use tax collections increased from $1.4 million in 2011 to $4.1 million in 2013 which the department attributes to awareness the e-mails generated.

Items sold by LLC, or its subsidiaries, and shipped to destinations in the following states are subject to tax:

Arizona Indiana Minnesota Ohio West Virginia
California Kansas Nevada Pennsylvania Wisconsin
Connecticut Kentucky New Jersey Tennessee
Florida Maryland New York Texas
Georgia Massachusetts North Carolina Virginia
Illinois Michigan North Dakota Washington


  • No sales tax is charged when purchasing gift cards; however, purchases paid for with gift cards may be subject to tax.
  • Items sold by Warehouse Deals and shipped to destinations in Alaska are subject to local sales tax.
  • Textbooks rented from Warehouse Deals and shipped to destinations in Delaware are subject to tax.
Nov 272015

Conditional legislation holds the fate of the Washington state sales tax

Washington voters recently approved an unusual ballot initiative which effectively holds the state sales tax hostage unless legislators propose a separate constitutional amendment related to future tax increases. Assuming the initiative survives an ongoing court challenge, the Washington legislature has until next April to approve a second referendum for the 2016 election. Otherwise, residents will see an immediate 1% cut in the statewide sales tax.

state sales taxMany states allow voters to enact legislation directly through an initiative process. In Washington, voters may initiate ordinary legislation but not amendments to the state’s constitution, which must be proposed by the legislature. This has frustrated efforts by anti-tax activists in the state to legislate a “supermajority” requirement for tax increases. A “supermajority” means each house of the Washington legislature would have to approve any future tax increase by a two-thirds vote rather than a simple majority. Although voters have passed a number of supermajority initiatives in recent years, they have either been suspended by the legislature or struck down as unconstitutional by the Washington Supreme Court. In a 2013 decision, the court held any supermajority rule required a constitutional amendment.

Since the legislature will not approve such an amendment on its own, supermajority proponents switched tactics. They proposed a new initiative, I-1366, which mandates a 1% cut in the state sales tax – reducing it from 6.5% to 5.5% – unless the legislature “first proposes” an amendment to the state constitution which would “require that for any tax increase, either the voters approve the increase or two-thirds of each house of the legislature approve the increase.” The initiative sets an April 15, 2016, for the legislature to act.

In the recent Nov. 3 election, Washington voters approved I-1366 by a margin of about 45,000 votes. But that does not mean the controversial measure will become law. Opponents of the law, including many local governments, have already filed a lawsuit challenging the initiative’s constitutionality. Specifically, opponents claim I-1366 is “beyond the scope of the people’s initiative power.” This past August, a Seattle judge declined to remove the measure from the ballot. On Sept. 4, the Washington Supreme Court upheld that decision.

The Supreme Court did not settle the underlying constitutional challenge to I-1366. Rather, it held the purpose of the measure was “not sufficiently clear” enough to warrant injunctive relief before the election. The lack of clarity refers to the dispute over what I-1366 actually proposes. Opponents argue it is an improper attempt to amend the state constitution by initiative. But proponents claim it is merely “conditional legislation” whose primary purpose is to cut the sales tax.

Indeed, conditional legislation is a common governmental practice. Congress often uses such legislation to condition federal funds on certain acts by states or private parties. For example, states raised their legal drinking age to 21 after Congress made it a condition for continuing to receive federal highway funds. But this is likely the first time a voter initiative has conditioned a state’s ability to collect taxes on a future legislative action.

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog

Nov 092015

Many states and cities offer preferential tax treatment to certain types of businesses. This often includes a temporary exemption from collecting sales and use taxes. Recently the District of Columbia successfully opposed an effort by a no preferential tax treatmentlocal television station to qualify for such a tax break.

In 2000, the Council of the District of Columbia, which exercises legislative power for the nation’s capital under a congressional mandate, adopted the “New E-Conomy Transformation Act.” This act authorized preferential tax treatment for businesses classified as “Qualified High Technology Companies” or QHTCs. Among other benefits, a QHTC is temporarily exempt from collecting the District’s 5.75% sales and use tax.

The act defines a QHTC as any individual or entity doing business in the District of Columbia with at least two employees and “deriving at least 51% of its gross revenues earned in the District” from one of five classes of high-technology activity. For example, a company providing “Internet-related services” such as web design would qualify as a QHTC.

Another qualified class includes “Information and communication technologies.” It was this classification which prompted the recent litigation. WRC-TV, the NBC television affiliate in Washington, DC, claimed it was as a QHTC and therefore entitled to a sales and use tax exemption. The District’s Office of Tax and Revenue (OTR) disagreed and assessed a “deficiency” of more than $78,000 against the television station. An administrative law judge upheld this assessment, prompting WRC to seek review in the District of Columbia Court of Appeals.

The court affirmed the OTR’s assessment in an October 22 decision. The core of WRC’s argument was it “generated”

at least 51% of its local revenues from “information and communication technologies.” That is to say, WRC purchased and “used” such technologies to produce its television programming. Like most broadcast television affiliates, WRC actually sells advertising, not tangible products or information technology services.

The Court of Appeals agreed with the OTR the District’s QHTC law “requires a much closer nexus” between “information and communications technologies” and the revenues generated by WRC’s advertising sales. As the court explained, “If WRC’s sale of advertising via technology-enabled television programming counts as a QHTC activity…then so would a similar technology-intensive provision of services for fees (in place of advertising) by, for instance, accounting, brokerage, or even law firms, with the resulting danger of a tax exemption swallowing up the taxation rule.” The court said the DC government clearly intended the QHTC designation apply to companies “engaged in the development and marketing of high technology systems,” rather than businesses, like WRC, which merely purchase such technology in order to produce and sell other services. Accordingly, the court affirmed the OTR’s decision and ordered WRC to pay $78,784.84  in back taxes.

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog

Nov 012015

Sales tax changes occurred in four states in Zip2Tax products since October 2015.

In Arizona, tax rates changed for Jerome, Sierra Vista and Mammoth.

In Tennessee, tax rates changed for Hardin County, Henry County and Dunlap.

In Wisconsin, tax rates changed for Brown County.

In Wyoming, tax rates changed for Converse County.

There were 28 states with ZIP code changes effective after October 2015 including Alabama, Arizona, California, Colorado, Connecticut, District of Columbia, Georgia, Illinois, Massachusetts, Maryland, Michigan, Minnesota, Missouri, North Carolina, Nebraska, New Jersey, Nevada, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Tennessee, Texas, Utah, Washington, Wisconsin and West Virginia. A PDF document enumerating ZIP code additions and deletions can be made available upon request.

Angel Downs, Zip2Tax's ead tax researcher

Angel Downs, Zip2Tax’s lead tax researcher

Oct 302015

Are pumpkins considered tax exempt food or non-exempt decorative items?

taxability matrix

If sales tax applies to jack-o’-lanterns, but not to edible pie pumpkins, what do you do in this case?

Pumpkins are one of those items where it isn’t clear whether the buyer is going to eat them or play with them. Only six states — Alabama, Idaho, Kansas, Mississippi, Oklahoma and South Dakota — do not exempt or at least reduce the sales tax rate on food and grocery items. This leaves pumpkin sellers with a conundrum. How is the determination to be made as to whether they are tax exempt food?

Back in 2007, Iowa briefly enacted and that same year repealed a law forcing retailers to attempt to determine whether the purchaser’s intended to eat or carve the bright orange squash. They were then supposed to charge sales tax on the carving jack-o’-lantern but exempt the sales tax for the delicious little soon-to-be treat.

The Iowa tax department sent a bulletin to retailers reminding them that where once all pumpkins were tax exempt food, now they were to be taxable if they were 1) advertised to be used as jack-o’-lanterns; and 2) they were understood to be jack-o’lanterns. How exactly one is supposed to “understand” the intended usage of a buyer and later prove that to the department of taxation is left to your imagination.

To complicate the matter even further, Iowa’s pumpkins could still be sales tax exempt if 1) the buyer presented a sales tax exemption certificate; 2) the pumpkin was of a pie variety and specifically advertised for that purpose, or 3) they were purchased using food stamps.

How are pumpkins treated in your state? Did you pay sales tax when you bought yours this year. Please comment and let us know your experience.


Oct 292015
sales tax returns

A whistle blower initially sued Sprint Nextel on the state’s behalf in what is known as a “qui tam” action. These lawsuits claim the defendant has defrauded the government and if a monetary judgement ensues, a portion is usually awarded to the whistle blower.

The New York Attorney General’s office recently won a major procedural victory in a four-year-old lawsuit accusing Sprint Nextel of filing false sales tax returns. New York’s highest court ruled state law “unambiguously” requires collection of sales tax on the full price flat-rate wireless telephone plans, even when charges for interstate calls are “unbundled” and stated as a separate item. The court’s decision may ultimately cost Sprint Nextel several hundred million dollars.

This is an unusual sales tax lawsuit. Normally a state’s revenue department assesses a delinquent taxpayer who must then seek a refund through the courts. But in this case New York’s attorney general, rather than the state’s tax department, sued Sprint Nextel. And in fact, a third party company initially sued Sprint Nextel on the state’s behalf before the attorney general later intervened. This is known as a “qui tam” action. These are basically lawsuits brought by whistleblowers who claim the defendant has defrauded the government in some way. If the government takes over the lawsuit and wins, the whistleblower usually receives a share of any monetary judgment.

Here, the attorney general alleges Sprint Nextel filed false sales tax returns. Specifically, Sprint Nextel did not collect (or report) sales tax for its flat-rate wireless plans “on the portion that it attributed to interstate and international calls.” The attorney general said this attribution was “arbitrary” and Sprint Nextel should have collected sales tax – which is 4% on mobile telecommunications services – on the full price of its plans. This is consistent with the New York Tax Department’s rules and the practice followed by Sprint Nextel’s competitors. Sprint Nextel argued the sales tax law was ambiguous on this issue and it relied on its own “reasonable interpretation” of the statute, so it should not be penalized.

A trial court denied Sprint Nextel’s motion to dismiss the case. An intermediate appeals court upheld that decision but asked the New York Court of Appeals, the state’s highest court, to review the case. On October 20, the Court of Appeals, by a 4-1 vote, agreed with the two lower courts.

Chief Judge Jonathan Lippman, writing for the majority, said New York law imposes tax on “voice services” sold for a monthly charge. The law makes no distinction between in-state and interstate (or international) calls. The statute is not ambiguous, Lippman said, nor is it preempted by federal law governing state-level taxation of mobile services. To the contrary, federal law provides “the only state that may impose [such] a tax is the state of the customer’s ‘place of primary use’.”

Lippman also said the attorney general pleaded sufficient facts to charge Sprint Nextel under New York’s False Claims Act. That said, the attorney general “has a high burden to surmount in this case,” as he must prove Sprint Nextel “knew the AG’s interpretation of the statute was proper, and that Sprint did not actually rely on a reasonable interpretation of the statute in good faith.” These will be issues for the trial court to resolve.

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog

Oct 202015

AT&T to BOE “Can you hear me NOW?” California’s 25 million sales tax appeal denied

Software is nontaxableOn October 8, a California appeals court rejected the state’s effort to collect an additional $25 million in sales taxes on specialized computer equipment used by telephone and data networks. This was not the first time California officials tried to collect such taxes, nor the first time the appeals court determined these actions were illegal. As a result, the court also ordered the state to reimburse the equipment manufacturer’s attorney fees and litigation costs, which were reportedly more than $2.5 million.

Telephone switches are computers used to route data and provide other telecommunications services such as voicemail. AT&T manufactured switches until 1996, when it spun the business off into Lucent Technologies. AT&T/Lucent continued to develop not only the physical switches but their underlying software. This software includes both copyrighted and patented material. When a telephone company purchased a switch from AT&T/Lucent, it included the right to copy and use this proprietary software. But as anyone who has ever owned a Windows computer knows, that does not mean the purchaser “owned” the software; it merely acquired a “license” to use the program on that particular switch.

AT&T/Lucent only collected sales tax on the physical equipment sold, not the software licenses. The California State Board of Equalization (SBE), which oversees sales and use taxes in that state, claimed this was an incorrect reading of the law. It assessed additional sales tax liability of approximately $24.7 million to cover the software licenses.

software is nontaxable

This map, courtesy of the Tax Foundation, shows the different sales tax treatments of different types of software by state. Orange indicates taxable, blue indicates tax exempt. (1: triangle) pre-made “canned” software purchased in the form of tangible property like a disk or CD; (2: square) canned software downloaded directly onto a computer; (3: circle) custom software purchased on a disk or CD; (4: starburst) custom software downloaded; and (5: star) custom software customized by the user for their use.

AT&T/Lucent paid the sales tax under protest then filed a court challenge. A trial judge ruled for the manufacturers and not only awarded a full refund but an additional $2.6 million in “reasonable litigation costs.” The SBE appealed.

But the California Court of Appeal, Second District, upheld the trial judge’s decision. As the appeals court explained, “transactions not involving tangible personal property, such as the sale of services or the sale of intangible personal property, are not subject to the sales tax.” With respect to software, the “default rule” in California held when a seller “grants an intangible license to copy copyrighted material” through tangible media, the transaction is not taxable provided the physical media itself is “not essential” to the buyer’s ability to use the program, in other words, software is nontaxable.  This was an “all-or-nothing” rule, according to the appeals court. So in 1993, the California legislature amended the default rule such that when a seller licenses a copyrighted or patented product, the seller must then separate the tangible and intangible portions of the sale and pay tax on the former.

Which is exactly what AT&T/Lucent did here. Nevertheless, the SBE argued the switch software should still be treated as “tangible” property because it was physically transmitted on magnetic tapes. (Essentially, the SBE claimed AT&T/Lucent sold magnetic tapes that happened to include software.) The Court of Appeal said this argument was not only “inconsistent with precedent,” but “leads to an absurd result,” because it would mean AT&T/Lucent owed an additional $25 million merely because it transmitted the software on tape and not electronically.

Indeed, the SBE was well aware of “precedent.” In January 2011, the same appeals court rejected the same argument from the SBE when it tried to assess sales tax on switching software sold by Nortel Networks, Inc. The SBE actually asked the court to overrule its Nortel decision. It declined to do so, noting the earlier case relied on a California Supreme Court decision, which the intermediate court was “not at liberty to disregard.” And since the Nortel decision “foreclosed” the SBE’s arguments in this case, the trial judge was within his authority in ordering the state to pay AT&T/Lucrent’s litigation costs.

Oct 082015

When you get into a car accident, the last thing you probably ask yourself is, “Will my insurer pay the sales tax on my replacement vehicle?” But a federal court in Florida recently answered that question. The judge’s landmark decision may lead to the certification of a class action against several auto insurance companies.

Bastian v. United States Automobile Association

The lead plaintiff in this case held an automobile insurance policy on her 2005 Acura. During the term of the policy, a tree fell on the car, resulting in its total loss. The insurance company determined the “actual cash value” of the vehicle was $10,459. This r
eflected the cost of replacing the original vehicle. The insurer also calculated the cost of obtaining title and license plates for the replacement vehicle, which came to $85.25.

The insurer further notified the plaintiff it would reimburse her for any sales tax paid on a replacement vehicle. Florida charges a statewide sales tax of 6%, which may be higher in some localities. The insurer did not include sales tax in its upfront settlement however, noting it reserved the right to do so until after the plaintiff purchased a new vehicle.

The plaintiff ultimately purchased a replacement vehicle for $2,000, for whichsales tax reimbursement on destroyed car she paid $120 in sales tax. The insurer reimbursed her accordingly. The plaintiff argued this was insufficient. She sued the insurer, arguing it should have included an upfront sales tax reimbursement based on the actual cash value of her destroyed vehicle, which came to $627.54. Several additional plaintiffs who claimed to have similar experiences joined the case and sought class action certification.

After an extended discovery period, U.S. District Judge Timothy J. Corrigan of Jacksonville issued an order on September 29. Corrigan held the plaintiffs were correct in asserting they were entitled to an upfront reimbursement of sales tax based on the actual cash value of their original vehicles. Corrigan based his decision primarily on the language of the actual insurance policies. While the insurer argued there was no language obligating it to pay sales tax at all, Corrigan said the policy covered a “total loss,” which logically includes all costs associated with replacing a vehicle. That would include sales tax.

Indeed, Corrigan noted the insurer here volunteered to pay license and title fees, which was “inconsistent” with its objection to paying sales taxes. Nor did it make sense the insurer would pay the lead plaintiff the actual cash value of her vehicle – the full $10,349 – yet withhold a few hundred dollars in sales tax. After all, Corrigan said, the insurer “did not demand that [the plaintiff] return $8,459 when she incurred only $2,000.00 in cost for her replacement vehicle.”

Nor did Corrigan accept the insurer’s claim Florida insurance law only permitted it to reimburse the plaintiff for the sales tax “actually incurred.” The statute in question affords insurers the option to “defer payment of the sales tax unless and until the obligation has actually been incurred.” As Corrigan interpreted this, the insurer must elect to use this option within the language of the actual insurance contract. The insurer did not do so here, and the judge declined to read such an election into the policy.

Corrigan’s decision is not the end of this case. He must still decide whether to certify the proposed class action, which would conceivably bring hundreds of additional claims into play. The insurers can also appeal Corrigan’s legal findings to the 11th U.S. Circuit Court of Appeals. The Florida Supreme Court may also be asked to weigh in at some point on Corrigan’s interpretation of state law.

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog