1. Taxing Services
Presented By Joseph Gaouette

2. 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?

3. Sales Tax – Child of the
Depression
• “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?

4. 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.”

5. Is this service taxable in
Minnesota? Round 1

6. Non-Medical Message?

7. Window Cleaning?

8. SECTION 1: REPAIR, ALTERATION, AND
SERVICING OF TANGIBLE PERSONAL
PROPERTY

9. Covington Pike Toyota, Inc. v.
Cardwell (Tenn. 1992)

10. 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?

11. 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?

12. 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.”

13. 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?

14. Section 2: Computer, Data
Processing, and Information
Services

15. 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?

16. 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

17. 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

18. Is this service taxable in
Minnesota? Round 2

19. Pet Grooming?

20. Extermination Services?

21. Telecommunication Services?

22. Section 3: Telecommunication
Services

23. Wait! Telecommunication
services?
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?

24. Telecommunications Services
• Definition: Two-way, electromagnetic communications
• Majority of states impose sales tax on
telecommunications services
• Consistent with utility services exception

25. 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?

26. 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?

27. Response?
“Interstate commerce may be required to contribute to the cost
of providing all government services, including those services
from which it arguably receives no direct benefit” – p. 183
Bottom line: IL can tax even if it cannot be proved that they
provided services for the commerce they are taxing
Takeaway: Remember that whatever the outcome of a tax on
telecommunications it has to come back to use in the state

28. 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

29. Are prepaid calling cards
taxable?
• 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?

30. 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

31. 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.

32. 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.

33. Telecommunication Services in
Conjunction 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

34. 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

35. 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.