Oct 142014

Sales tax laws often distinguish between taxable products and non-taxable services. For example, a pizza restaurant may have to collect sales tax on the sale of pizzas, but not on any delivery fees attached to that sale. This distinction may not always be obvious, however, and many combined product-service providers run afoul of local tax authorities on this issue.


A divided Louisiana appeals court found that cleaning and disposal of waste from portable toilets was considered a taxable provision of tangible property rather than a non-taxable service regardless of the fact that the cleaning services were optional and also stated separately on the invoices.

Here is a recent example from Louisiana. The City of East Baton Rogue assesses a 2% tax on the “gross proceeds” from the sale or rental of “tangible personal property.” The city exempts most “services” from the tax.

Pot-O-Gold Rentals leases portable toilets and holding tanks to customers in East Baton Rogue. Pot-O-Gold also provides cleaning and disposal services, both for its own products and those sold by other companies. Based on its reading of local law, Pot-O-Gold collected the 2% sales tax on its toilet rentals, but not on its cleaning or disposal services, which were stated in a separate charge on customer invoices.

During a 2011 tax audit, the city of East Baton Rogue assessed Pot-O-Gold for nearly $70,000 in back sales taxes, together with penalties and interest. The city argued Pot-O-Gold read the services exemption incorrectly; any cleaning and disposal provided in connection with the rental of toilets is subject to tax. Pot-O-Gold challenged the city’s position in court.

A trial judge sided with Pot-O-Gold, but in a decision issued on Sept. 17, a divided Louisiana First Circuit Court of Appeal ruled in favor of the city. Judge Mitchell R. Theriot, writing for the majority, said since the “true object” of Pot-O-Gold’s toilet rentals was the provision of tangible property to customers, the entire transaction – including any cleaning or disposal services – was subject to local sales tax. It did not matter that the cleaning services were optional, or that Pot-O-Gold provided standalone, nontaxable services to other customers.

Judge J. Michael McDonald filed a dissenting opinion. He said the majority’s decision created “an absurd result”: Pot-O-Gold had to collect sales tax for cleaning its own toilets, but not for cleaning someone else’s. McDonald said this was inconsistent with other areas of Louisiana sales tax law. For instance, removing garbage from a dumpster is not considered a taxable event according to the Louisiana Department of Revenue. But, according to the majority, Pot-O-Gold’s services were merely “incidental” to the rental of the toilets, and therefore subject to tax.

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

Oct 072014

The medical use of cannabis – marijuana – is controversial in the United States. But other countries, like Canada, allow licensed producers to cultivate and sell marijuana for medicinal purposes. A Canadian judge recently considered the question of how to classify such medical marijuana sales for sales tax purposes.

Cannabis in Canada

In Canada, medical marijuana is not taxable if obtained with a doctor’s prescription. But cannabis is subject to the GST if obtained through a legal private club with a just a medical certificate.

Unlike the United States, where sales tax is a purely state and local matter, Canada has a combined federal-provincial sales tax known as a Goods and Services Tax (GST). The GST applies to all sales of property and services, although many categories of transactions are subject to a “zero-rate,” which effectively exempts them from the tax. Under current law, the zero-rate applies to any “drug” listed on the government of Canada’s schedule of controlled substances. This exemption covers most prescription drugs.

Gerry Hedges grew cannabis in British Columbia for sale to a local medical marijuana club. The Canadian government said Hedges failed to collect more than $300,000 in back sales taxes on his cannabis. Hedges appealed the government’s assessment, arguing his cannabis constituted a zero-rate drug.

Judge Campbell J. Miller of the Tax Court of Canada heard the case. In a decision issued last month, Miller agreed with the government and said Hedges’ marijuana was subject to the GST. While the term “drug” includes marijuana, according to Miller, the GST law also requires the drug be made available only by prescription to qualify for the zero-rate. And Canadian law has been muddled on this point. Before 2013, a person only needed a certificate from a medical practitioner before legally obtaining medical marijuana, which according to Miller was not the same thing as a prescription one would give to a pharmacist. Last year, the government amended its regulations to require a prescription, which must be filled by a government-approved dispensary, rather than a private club like the one Hedges dealt with.

Miller said “[t]here is understandable confusion in the industry” as a result of the government’s changing regulations. There are effectively two ways to obtain medical marijuana. If it is obtained from a government dispensary with a prescription, it is considered a zero-rate drug under the GST. But if, as was the case with Hedges’ sales, marijuana is obtained through a private club with a medical certificate, the seller must collect the GST. Miller acknowledged his decision does not totally clarify the law, as “there remain gaps and inconsistencies” due to the government’s evolving approach to medical marijuana.

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

Sep 302014

Sales and/or use tax rates have changed for 16 states in Zip2Tax products since September 2014. There were changes in Alaska, Alabama, Arizona, Arkansas, California, Idaho, Kansas, Minnesota, North Carolina, Nebraska, Nevada, Oklahoma, Ohio, Texas and Washington.

In Alaska, tax rates changed for Sitka, Skagway and Whittier.

In Alabama, tax rates changed for Enterprise, Childersburg, Greensboro, Marion, Tuskegee, Jackson, Trafford and Union.

In Arizona, tax rates changed for Flagstaff.

In Arkansas, tax rates changed for Crawfordsville, Ekins, Greers Ferry, Cleveland County, Crawford County and Crittenden County.

In California, tax rates changed for Anderson, Cotati, Davis, Hayward, San Pablo, Truckee and Watsonville.

In Idaho, tax rates changed for Nez Perce County.

In Kansas, tax rates changed for Fairway and Mulvane.

In Minnesota, tax rates changed for Douglas County.

In North Carolina, tax rates changed for Davidson County.

In North Dakota, tax rates changed for Burleigh County, Leeds, Morton County, Watford City and West Fargo.

In Nebraska, tax rates changed for Fairfield, Hickman, Atkinson and La Vista.

In Nevada, tax rates changed for Carson City.

In Oklahoma, tax rates changed for the counties of Greer, Latimer, Marshall, Washita and Logan and the cities of Kiowa, Kaw City and Chouteau.

In Ohio, tax rates changed for Erie County.

In Texas, tax rates changed for Tatum, Aubrey, Annetta, Fayetteville, Lakeport, Rogers, Shavano Park, Terrell Hills, Lucas and Tuscola.

In Washington, tax rates changed for Marysville TBA.

There were 12 states with ZIP code changes effective after September 2014 including Alabama, California, DC, Delaware, Massachusetts, North Dakota, New Hampshire, New Mexico, Ohio, Oregon, Tennessee and Texas.

Download the full ZIP code change documentation.

Angel Sauer

Angel Sauer, sales tax research team leader

Sep 302014

In response to today’s reality where security breaches are one of every IT departments top concerns, Zip2Tax is addressing that concern by updating the sample codes for the Database Interface direct connect methods to take advantage of our safer and more secure API. The API provides your account with extra levels of validation to “hide” your activity and prevent data leakage and “SQL injection” attacks. This API masks your server’s information, adding firewalls between your data and potential security breaches.

ACTION IS REQUIRED: Please note, to take advantage of the benefits the API has to offer, you must replace the existing code in your system with the new code samples provided on our web site at API Connect Samples.

As an additional benefit, the new API can provide more information than the original direct connection could. While the sSecure APIamples provided here have the same data fields as the original samples had, the new API does contains more information which you may find of value. Data such as latitude and longitude, jurisdictional warning messages and even special notes on the taxability of certain items can be obtained if your coder follows the directions for the API and modifies the code following the same general parameters.

Although the older direct connect methods will continue to function, we will no longer provide customer support for them and we have removed the code sample pages from the live web site. Below, you will find a list of the original direct connect code and the updated API samples for your reference. We encourage you to switch over to the new code at your soonest convenience. Please call our offices at 866-492-8494 or e-mail info@zip2tax.com if you have any questions.

SQL Server using ASP  —  Recommended upgrade: API using ASP

SQL Server using ASP.NET  — Recommended upgrade: API using ASP.NET

SQL Server using C#.NET  — Recommended upgrade: API using C#.NET

MySQL using PHP  — Recommended upgrade: API using PHP

Sep 292014


November is lame duck season

Senate Majority Leader Harry Reid (D-Nev.) has placed passage of the Marketplace Fairness Act (MFA) at the top of his post-election priority list claiming he’ll “do whatever it takes to get that done.”

Apparently getting that legislation passed is high enough of a priority to cause him to bundle it with the Internet Tax Freedom Act (ITFA), a soon-to-expire act which prevents taxes on Internet access. ITFA not only has widespread popular support but lends urgency to the long-languishing MFA.

But getting the legislation passed through the House this year is anything but a done deal. Both Speaker John Boehner (R-Ohio) anlame duck congressd Judiciary Committee Chairman Bob Goodlatte (R-Va.) have said they oppose the MFA.

Rep. Jason Chaffetz (R-Utah) is working on a compromise but a spokesperson for Chaffetz said it was too soon to know whether a bill could be ready by year’s end.

“We’re always working to find something that will attract the necessary votes in the House to pass,” Senate Majority Whip Dick Durbin (D-Ill.) said in September. Durbin is one of the bill’s top supporters, along with Sens. Lamar Alexander (R-Tenn.) and Mike Enzi (R-Wyo.).

Jason Brewer, of the Retail Industry Leaders Association, a supporter, said that pairing the two tax bills allowed retail groups to make the case that their measure wasn’t an “Internet tax. “For every member that is saying, ‘Let’s get ITFA done,’ there’s another member saying, ‘Let’s get both done,’ ” Brewer said.

Reid faces opposition even from within his own party. Senate Finance Committee Chairman Ron Wyden (D-Ore.) warned his colleagues that anyone trying to combine the two bills was “holding the Internet economy hostage.” “Anyone who votes for passing MFA alongside ITFA is voting to repeal the Internet Tax Freedom Act,” Wyden said.

Sep 262014

The U.S. Constitution grants Congress the exclusive power to regulate “commerce with the Indian tribes,” a general term used to describe indigenous Native American groups. The federal government presently recognizes 562 American Indian tribes representing nearly 2 million individuals. The secretary of the interior oversees tribal reservations, and federal law exempts such lands from state and local taxes, including sales tax.

Indian reservation sales taxThe scope of this exemption is presently the subject of a dispute between Florida’s Department of Revenue and the Seminole Tribe of Florida, a group of about 2,000 Native Americans with six reservations located throughout the state. The Seminole lease parts of their land to outside commercial businesses. The department’s executive director, Marshall Stranburg, argued these leases are subject to Florida’s 6% “transient rental tax,” a form of sales tax on commercial property. The Seminole replied federal law prevents Stranburg from requiring the tribe to collect such a tax.

On Sept. 5, 2014, U.S. District Judge Robert N. Scola, Jr., of Miami agreed with the Seminole and granted the tribe’s motion for summary judgment against Stranburg. Scola said the secretary of the interior’s regulations governing Indian tribes clearly prohibit a state from assessing any form of tax on the “permanent improvements” or “activities conducted” on restricted reservation lands, including leases to non-Indians. While acknowledging higher federal courts, including the U.S. Supreme Court, have not directly addressed this particular situation, Scola was confidant current law preempted Florida’s authority to collect sales tax on the Seminole leases.

Scola said the courts should defer to the secretary’s “comprehensive analysis” of the impact of state taxes on Indian tribes. Scola noted the Interior Department, through its Bureau of Indian Affairs, deals with tribes on a day-to-day basis and therefore understands the “chilling effect” Florida’s sales taxes could have on Seminole lands. At a minimum, such taxes reduce the amount of money available to the Seminole for the benefit of its members.

Scola also rejected the Department of Revenue’s efforts to tax the utility services provided to the Seminole. Florida assesses a 2.5% tax on the “gross receipts” of the delivery or sale of gas or electricity to a “retail consumer.” Scola determined that this was an “impermissible direct tax” on the Seminole Tribe, which could not be collected on any utilities delivered to reservation lands.

The Florida Department of Revenue may still appeal Scola’s decision to the U.S. Eleventh Circuit Court of Appeals in Atlanta.

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

Sep 242014

Minnesota high court finds that customized software sales tax exempt only if prewritten portion stated separately on invoice

computer software invoiceSales tax exemptions often turn on matters of form over substance. How you bill a client – not what you bill them for – can determine whether you must collect sales tax. A Minnesota software company recently learned that painful lesson after losing a battle in state court over the assessment of back sales taxes.

The company, LumiData, provides sales-tracking software to retailers. According to LumiData, each customer purchases a custom software package tailored to their needs. The Minnesota-based company did not collect sales taxes on dozens of these sales between 2005 and 2008. In 2009, Minnesota’s commissioner of revenue audited LumiData and assessed more than $233,000 in back sales taxes, together with over $65,000 in penalties and interest.

Under Minnesota law, the sale of “prewritten computer software” is subject to sales tax. This excludes software “that is not designed and developed by the author or other creator to the specifications of a specific purchaser.” LumiData argued its software fell within this exclusion. But the commissioner disagreed, that LumiData did not separately state any “customization” charges in its customer invoices, as the law requires. LumiData replied the entire software package was customized and therefore a separate charge should be unnecessary.

Unfortunately, neither Minnesota’s Tax Court nor the state’s Supreme Court agreed with LumiData. In a decision issued on Sept. 10th of this year, the Minnesota Supreme Court unanimously affirmed the findings of the commissioner and the court holding LumiData liable for sales tax on all of its prior software sales. Justice Wilhelmina M. Wright authored the Supreme Court’s opinion. She concluded while LumiData customized its software for each customer, the overall package represented “a combination of prewritten and customized software.” Therefore the burden was on LumiData to state a separate charge for customization in order to receive a sales tax exemption.

Wright said LumiData could not simply declare its entire package was customized and therefore exempt from sales tax. She credited the Tax Court’s finding that LumiData failed to provide any evidence – beyond the self-interested testimony of its own employees – proving its entire fee was related to customization.

Wright also upheld the commissioner’s assessment of penalties against LumiData for failing to pay its sales taxes on time. Normally a taxpayer can avoid such penalties in Minnesota if it relied upon the advice of its accountant. But here, Wright said LumiData failed to even ask its accountant for a formal opinion.

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

Sep 082014

papa johns sales tax battleOn July 23, a federal judge in Tampa declined to dismiss a class action against Papa John’s, America’s fourth-largest pizza chain, over allegations Florida customers were improperly charged sales tax on delivery fees. While the judge did not determine whether or not the allegations were true, her decision forced Papa John’s to file a formal answer to the class action complaint. The judge also ordered both sides to meet with a mediator this coming November in an effort to avoid a jury trial.

The crux of the class action complaint is that Papa John’s improperly included its $3 delivery fee in calculating Florida sales tax. The class action plaintiffs argue Florida law only requires sales tax on the sale of pizza itself, not any additional delivery fees. The plaintiffs seek to recover the alleged sales tax overpayments on behalf of all affected Papa John’s customers.

In its motion to dismiss, Papa John’s argued the class action was inappropriate for several reasons. First, Papa John’s cited Florida law, which expressly bars a customer from recovering sales tax overpayments collected by a retailer—so long as the retailer actually remitted said payments to the state. Second, Papa John’s said since customers voluntarily paid the sales tax on the assumption it applied to the delivery fee, the company could not be held liable even if the tax was erroneously charged. Finally, Papa John’s said even if the plaintiffs are entitled to a refund, they must first apply to the Florida Department of Revenue, who actually received the allegedly erroneous payments.

U.S. District Judge Virginia M. Hernandez Covington said none of those arguments justified dismissal at this time. The judge did not rule on the merits of Papa John’s first two arguments; she merely found they presented disputed issues of fact for a jury to decide. On the final argument, the judge said Florida law does not allow customers to request a tax refund directly from the state. To the contrary, the law only permits the retailer, Papa John’s, to seek a refund, and customers must then seek a refund from the company.

Judge Hernandez Covington also denied Papa John’s request to delay the case until the Florida Department of Revenue could determine whether or not sales tax was required on delivery fees. No delay was justified, the judge said, because Florida administrative regulators have already made it clear that such charges are illegal.

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

Sep 082014

Hotel occupancy taxes ruled not due on online markups in North Carolina

Online travel companies (OTCs) won another important sales tax victory last month in North Carolina, where a state appeals court rejected efforts by four counties to assess occupancy taxes on the fees collected for Internet-based reservations of hotel rooms. The OTCs obtain rooms for the hotels at a discount and sell them to customers at a higher rate. The counties argued the OTCs should then pay occupancy taxes on their higher rate. The courts disagreed.

Online Travel Companies

Online travel companies (OTCs) won another important sales tax victory last month in North Carolina, where a state appeals court rejected efforts by four counties to assess occupancy taxes on the fees collected for Internet-based reservations of hotel rooms.

The North Carolina legislature allows counties to assess occupancy taxes through local ordinance. But the counties may only tax those transactions already subject to the state’s sales tax. The four counties in this case all impose occupancy taxes: 6% in Wake County, 5% in Dare County, 4% in Buncombe County and 8% in Mecklenburg County. All four counties filed separate lawsuits against a number of OTCs seeking judgments the companies were required to collect and remit occupancy taxes. The four lawsuits were eventually consolidated and heard before a state superior court judge, who granted the defendants’ motion to dismiss in 2011.

In a decision issued August 19th of this year, a three-judge panel of the North Carolina Court of Appeals upheld the superior court’s dismissal. Judge Wanda Bryant, writing for the panel, said sales and occupancy taxes only applied to “retailers” or a “similar type business.” The counties conceded the OTCs were not retailers. Therefore, the question was whether they constituted “similar type” businesses. Bryant said they were not. In this context, the “type” of business was anyone who operated “hotels, motels, tourist homes, or tourist camps,” not companies that merely “arrange” the rental of such facilities via the Internet. The counties argued the court should read the definition of “similar” business more “broadly,” but Bryant said that would “ignore” the clear language of the state’s sales tax law.

The appeals court also rejected the argument, principally raised in Mecklenburg County’s complaint, that the OTCs had a duty under their contracts with individual hotels to collect and remit sales tax on the marked-up prices charged to online customers. Bryant said the trial court properly granted summary judgment to the OTCs on this point, noting the counties failed to identify any North Carolina statute or binding case law on this point. Unlike other states, Bryant said, North Carolina does not recognize a general duty to remit sales tax based on “contractual undertaking.”

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

Sep 022014

Sales and/or use tax rates have changed in in Zip2Tax products in one state since August 2014.

In Alabama, tax rates changed for Pleasant Grove, Red Bay, Union Springs and the county of Chilton.

There were 12 states with ZIP code changes effective after August 2014 including Alabama, California, the District of Columbia, Delaware, Massachusetts, North Dakota, New Hampshire, Ohio, Oregon, Tennessee and Texas.

Download the full ZIP code change documentation.

Angel Sauer

Angel Sauer, sales tax research team leader