Minnesota joins a growing number of states (e.g., Colorado, Massachusetts, Ohio, Pennsylvania and Washington) that are allowing, and even requiring, purchasers to provide vendors with an exemption certificate claiming Multiple Points of Use (“MPU”), or an exemption akin to MPU, when computer software, digital goods or computer services will be available for concurrent use at the time of purchase. Minnesota’s provision, however, is limited in regards to software – only software delivered electronically falls within the MPU provisions.
While classified as an exemption, the MPU really acts as an administrative provision in that it does not qualify a transaction for an exemption, but rather relieves the seller of the obligation to collect tax and shifts the already existing burden to the purchaser to remit use tax on the purchase.
MPU was a concept developed and contained within Section 312 of the Streamlined Sales and Use Tax Agreement (the “Agreement”). The MPU provision was revised and amended on April 16, 2005, and all members were required to adopt the amended version by January 1, 2008. The drafting of a white paper to further detail the specifics of this provision caused significant controversy. As a result, the MPU provisions were repealed from the Agreement at the December, 2006 Governing Board meeting. Almost all SSUTA member states followed suit and repealed their MPU provisions, including Minnesota who repealed its provisions effective March 8, 2008.
Minnesota has now reversed its position, and effective July 1, 2013, a purchaser of digital products, computer software delivered electronically, or a taxable service may source the sale to multiple locations if the purchaser knows at the time of purchase that these items will be used concurrently in more than one taxing jurisdiction. Our understanding, however, is that this legislation has codified what the Department has been doing from a “policy perspective” ever since the repeal of its MPU provisions. It is interesting that Minnesota chose to limit its MPU provision in regards to computer software, given that prewritten computer software is expressly included in the definition of tangible personal property, regardless of delivery method. Thus, there appears to be no rational basis for this limitation. Minnesota taxpayers should assure that all software purchases be received in electronic form to assure that they have the ability to apportion the tax base in Minnesota, thereby possibly reducing their overall tax liability (by allocating to no tax or lower tax rate states).
Now the fun officially begins as taxpayers will have to work with auditors to reach agreement as to what constitutes concurrent use, and how to apportion the tax base.
Concurrently Available for Use
Minnesota has defined “concurrently available for use” to mean that employees or other agents of the buyer may use the digital products, computer software delivered electronically, or services simultaneously from one or more locations within this state and one or more locations outside this state. A digital code is concurrently available for use within and outside this state if employees or other agents of the buyer may use the digital products to be obtained by the code simultaneously at one or more locations within this state and one or more locations outside this state.
Concurrently available for use should not be a controversial determination – if you have users accessing the software both within and without the state, it should fall within the provision.
In regards to the tax base, Minnesota has provided the purchaser with some degree of flexibility in determining its apportionment method. The apportionment method can be based on any reasonable method, as long as it is applied in a consistent and uniform manner, and the method can be justified through supporting records. The term “reasonable” leaves much room for interpretation – who’s to argue that any of the following (all of which can result in varying liabilities) may be deemed reasonable:
- expected usage;
- actual usage;
- pro-rata split; or
- “value” of the usage (management versus line employees)?
Many of the other states that have already enacted MPU-like provisions have been trending towards situsing based on “user location.” While an analysis of which method to use should be considered on a state by state basis, the use of varying methods by state may impact the consistent and uniform manner provided for in Minnesota’s MPU provisions. Thus, taxpayers should not make these decisions in a vacuum, but should consider the national ramifications of each transaction. Most importantly, a taxpayer should document the method it chooses, the rationale behind it, and be proactive in explaining this method to the auditor to minimize its chances of being challenged.
Given the move by many businesses to cloud-based platforms, it is likely we will see more states moving to situsing single transactions on a multi-state basis. Given the fact that many sellers do not have the ability to charge more than one states’ tax on a single transaction, states will be forced to accomodate this issue by shifting the burden from one of the seller to one of the purchaser.
As always – your questions and comments are not only welcomed – but greatly appreciated.
This issue, as well as other sales tax issues associated with cloud transactions will be discussed during a live “How States Tax the Cloud” webinar being offered by the Sales Tax Institute on August 7, 2013. Click link to learn more or register.
Other recent “Cloud, Software & Digital Tax” posts by Carolynn Iafrate Kranz:
- Texas SaaS: Text & Messaging are Taxable Data Processing Service
- SaaS Characterized as Taxable Telecommunications Service
- Pennsylvania Tax on Software Support Services: Ruling Re-issued
- Illinois Finally Rules on SaaS
- Tennessee’s Situsing of Accessed Software Runs Afoul