Tag: Internet

A Tech Industry-Friendly Stance On Cloud Computing Tax

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In a pleasant surprise, the New Jersey Division of Taxation recently issued guidance announcing that sales tax is not due on most cloud computing services. New Jersey’s position is contrary to a growing national trend in which many states have taken the position that cloud computing is subject to sales tax as the sale of software.

New Jersey demonstrates a pro-information technology industry position. It also comes at the same time that Massachusetts, traditionally an extremely technology-friendly state, appears to have changed its policy direction on taxation of information technology services.

New Jersey Technical Bulletin 72 addresses three types of cloud computing services:

software as a service (SaaS), which offers the use of software on a per transaction basis, through a service contract or by a subscription;

platform as a service (PaaS), which provides access to computing platforms; and

infrastructure as a service (IaaS), which provides hardware, software and other equipment and services necessary to support and manage the content and dataflow of its customers.

The technical bulletin says that software as a service is not subject to New Jersey sales tax as the sale of software because it is not delivered in tangible form, it is not downloaded onto the customer’s computer and title to the software is not transferred to the customer.

However, the bulletin does say that certain types of SaaS may be subject to sales tax as a taxable information service. A taxable information service is defined as:

The furnishing of information of any kind, which has been collected, compiled or analyzed by the seller and provided through any means or method, other than personal or individual information which is not incorporated into reports furnished to other people.

The bulletin then cites examples of taxable information services such as Westlaw, LexisNexis, Commerce Clearing House (CCH) and Rich Internet Application (RIA). But it would appear that most other classes of

SaaS that do not involve compiling or analyzing information should not fall into the taxable information service category. This is a fact-based determination, which would require analysis on a case-by-case basis.

The bulletin states that platform as a service and infrastructure as a service would not be subject to sales tax because they do not represent the sale of tangible personal property, but merely access to the software. The bulletin states that IaaS arrangements that show billing for the rental of hardware (e.g., servers) are not taxable because the customer does not have title or possession of the equipment.

Finally, the bulletin says that web hosting and data hosting services are not subject to New Jersey sales tax.

The position taken by the New Jersey Division of Taxation is quite favorable to providers and customers of cloud computing services, as other states have been taking the opposite approach, saying that many of these services are taxable, including states such as New York, Pennsylvania and Vermont.

Companies that provide cloud-based computing services should determine the states in which they might have a sales tax collection obligation, and whether the services they provide are subject to that state’s sales tax.

To see the full text of this new technical bulletin, please follow this link and click on TB-72.

This pro-IT industry move is in contrast to a new Massachusetts law that went into effect on July 31, just a few weeks after the bill being passed by its Legislature. This new Massachusetts law signals a sea change in the Bay State’s pro-technology industry policy.

Massachusetts now imposes sales tax on most software and hardware design, installation and integration services, including the modification, integration, enhancement, installation and configuration of prewritten software.

So, this new tax will include amounts paid in order to customize any prewritten software for the needs of the customer, including macros and plug-ins that operate in conjunction with the software (although there are exemptions for modifications to free open source software, and software that operates industrial machinery).

This expansion of the Massachusetts sales tax will cast a wide net that will tax hardware and software consulting services that have not been taxable in the past, from the biggest, most sophisticated software consulting firms that manage the integration of software for large corporations, down to the high school student who helps non-tech savvy baby boomers set up their home computer for $20 an hour.

This apparent new direction taken by Massachusetts is a huge contrast to the position staked out by the state’s then-Gov. Paul Cellucci in the early years of the Internet boom, when the debate on the taxation of e-commerce sales was just beginning.

A bill had been introduced in Congress to exempt all e-commerce sales from state taxation. Cellucci was quoted in the Feb. 4, 2000, edition of State Tax Notes as being in favor of the measure because it would be bad tax policy to tax the emerging Internet industry:

Arguing that ‘the rapid growth of high-tech in the past five years’ has created 450,000 new jobs in his state, Cellucci said the taxation of remote and electronic commerce is ‘not just a real threat to the economy of Massachusetts, but for the nation as a whole. Unlike traditional brick-and-mortar businesses, e-commerce ventures are extremely portable, and could easily move their headquarters to an offshore island where they would be immune from any sales tax from this country. (Tax Analysts Document Number: Doc 2000-3441.)

The new Massachusetts law indicates a reversal of the state’s earlier pro-industry policy, while New Jersey, which in prior years has taken an aggressive tax approach to IT taxation, has apparently also reversed course, but in the opposite positive direction.

It is possible that Massachusetts has grown complacent, assuming that its enormous stockpile of human innovation capital will stay put, while New Jersey appears to be recognizing the value of cultivating the IT industry in the Garden State. Time will tell if these shifts in policy toward the IT industry will result in any measurable migration.

This article was previously published by Law360.

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Starting an Online Business: Licensing Requirements

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Individuals interested in starting an online business are often confused or uninformed as to the licensing requirements for such businesses.  In many ways, an online business is like any “brick and mortar” store and the owner will probably be required to obtain certain licenses or permits to operate.

Federal Requirements

Business Licenses.  Most businesses do not require a federal business license or permit.  However, a business engaged in one of the following activities should contact the responsible federal agency to determine the requirements for doing business:  Investment Advising, Drug Manufacturing, Preparation of Meat Products, Broadcasting, Ground Transportation, Selling Alcohol, Tobacco, or Firearms.

Tax Identification Number.  A federal tax identification number, also known as an Employer Identification Number (EIN), is a federal identification number issued by the Internal Revenue Service to identify a business entity.  Nearly all businesses are required to have a tax identification number.

If a business is operated as a sole proprietorship, the owner may use his or her social security number in place of an EIN on all governmental forms and other official documents.  However, most small business advisors recommend using a federal tax identification number instead.

To obtain a federal tax identification number, a business owner should contact the nearest Local IRS Field Office or call the IRS Business and Specialty Tax Hotline at 800-829-4933.  The necessary form, IRS Form SS-4, can be downloaded directly from the Small Business Administration website.

State Requirements

Many states and local jurisdictions require a person to obtain a business license or permit before beginning business operations.  A business that operates without the required license or permit may be subjected to fines or may be barred from further business activity.  In some localities, a business operating out of a residence may require an additional permit.

While business licensing requirements vary from state-to-state, the most common types include:

·    Basic Business Operation License – a legal document issued by a local governmental authority that authorizes a person to conduct business within the boundaries of the municipality.  Many states have established small business assistance agencies to help small businesses comply with state requirements;

  • Fictitious Name Certificate – a document, usually filed with a state agency, which is required to operate a business using an assumed name or trade name (essentially, any name other than the full, formal name of the individual or company);
  • Home Occupation Permit – a permit which may be required to conduct business from a residence;
  • Tax Registration – if the state has a state income tax, a business owner must usually register and obtain an employer identification number from the state Department of Revenue or Treasury Department.  If the business engages in retail sales, the owner must usually obtain a sales tax license;
  • Special State-Issued Business Licenses or Permits – these permits may be required for a business that sell highly-regulated products like firearms, gasoline, liquor, or lottery tickets;
  • Zoning and Land Use Permits – may be required to develop a site or property for specific purposes
  • Employer Registrations – if the business has employees, the owner must usually make unemployment insurance contributions;

Additional state licenses may be required for regulated occupations such as building contractors, physicians, appraisers, accountants, barbers, real estate agents, auctioneers, private investigators, private security guards, funeral directors, bill collectors, and cosmetologists.

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The “Dot-Brand” Explosion: What You Need To Do Now

Dickinson Wright LogoEarlier this year the company that manages the global internet address system (the Internet Corporation for Assigned Names and Numbers, or ICANN) accepted the first round of applications for new “generic top level domains,” or gTLDs – the part of an address that goes to the right of the dot. Most businesses register domain names that use the familiar “.com” suffix or one of a handful of other available options such as “.org” or “.biz.” The new program makes it possible to register a business name, a trademark – indeed, virtually any word in any language – as a TLD in its own right. Depending on whose crystal ball you consult, this Dot-Brand initiative could revolutionize the way the internet works, or hopelessly complicate it, or both.

The initial application window recently closed. The list of applications offered a few surprises, a number of omens for the future – and some important action items for brand owners who did not apply for a gTLD this time around.

  • One surprise was the sheer number of applications. Originally, ICANN was anticipating 500 or so. In the end there were almost 2,000 (at $185,000 apiece!) The unexpected volume slowed down the application process, and will surely slow the review and approval process even more.
  • Many of the applications were for famous brand names (.chevy, .nikon, .walmart) and several were for geographic locations (.paris, .nyc, .amersterdam). The most interesting ones were for generic terms like .art, .tech, and .store, which will be of interest to a great many people. Lots of brand owners in the auto industry, forexample, may want to be part of the “.cars” domain.
  • Not surprisingly, many of these generic domains are the subject of multiple applications: thirteen for .app; seven each for .mail and .news; nine for .shop. There will be a lengthy dispute-resolution process, probably culminating in an old-fashioned auction to the highest bidder, to see who ultimately gains control of these domains.

A recent survey of attorneys responsible for protecting trademarks found that while 91 percent were aware of the new gTLD program, only 36 percent had read the Applicant Guidebook, which explains how the process work. That Guidebook, and the initial application list, suggests some important steps you should take now to protect your brand:

1. Make sure no one has applied for a domain that incorporates one of your trademarks. A formal objection period for addressing such issues is now open and will run until January 2013.

2. Identify “generic” domains of interest, and investigate the applicants and their business plans. If you’re in the financial services sector, for example, you’ll want to know who’s behind the applications for .bank, .broker, .finance, .fund, .insurance, .investsments, .lifeinsurance, .loans, .money, .mutualfunds, and others. A 60-day comment period, open to anyone, runs through August 12; if there is something ICANN ought to know about one or more of the applicants or proposed domains, now is the time to tell them.

3. Start planning for defensive domain-name registrations in appropriate generic and geographic domains. Depending on the business you’re in, you may want to make sure you are the first to register your company name and key trademarks within appropriate domain names – before someone else does. The “someone else” could be a competitor, or just an old-fashioned cyber-squatter of the sort brand owners have been dealing with in the .com sphere for years. And don’t forget about domains like “.sucks,” where having someone else register your brand could be embarrassing.

The best defense is a good offense. Starting in October 2012, for a small fee you will be able to list your brand names in ICANN’s Trademark Clearinghouse; anyone that tries to register your brand as a domain name will be advised of your rights.

Update on Advanced Micro Devices (AMD) Trade Secret Misappropriation Case: Judge Hillman Issues Narrow Interpretation of the Computer Fraud and Abuse Act (CFAA)

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As originally discussed on this blog back in February, a lawsuit brought by Advanced Micro Devices (AMD) against former employees accused of taking AMD trade secrets with them to competitor Nvidia has been ongoing and a recent opinion in the case highlights the uncertainty surrounding the Computer Fraud and Abuse Act (CFAA).

A recent opinion issued by Judge Timothy S. Hillman narrowly interpreted the CFAA in this case. Judge Hillman declined a broad interpretation of the CFAA and held that AMD’s allegations in its complaint are insufficient to sustain a CFAA claim.

The relevant portion of the CFAA provides that it is a violation of the CFAA to:

Knowingly and with intent to defraud, [access] a protected computer without authorization or [exceed] authorized access, and by means of such conduct [further]the intended fraud and [obtain] anything of value, unless the object of the fraud and the thing obtained consists only of the use of the computer and the value of such use is not more than $5,000 in any 1-year period.

computer broadcast world

There exists a circuit split on the interpretation of this clause. As Judge Hillman noted, the 1st Circuit has not clearly articulated its position on the issue. The broad interpretation defines access in terms of agency or use. That is, whenever an employee breaches a duty of loyalty or a contractual obligation and acquires an interest adverse to their employer, then all subsequent access exceeds the scope of authorized access. Proponents of the narrower interpretation argue that the intent of the CFAA was to deter computer hacking and not to supplement common law trade secret misappropriation remedies and therefore fraudulent means must be used to obtain the information initially.

Judge Hillman utilized a narrow interpretation of the CFAA and held that AMD had not pleaded sufficient facts to maintain a cause of action under the CFAA. AMD had pleaded that the defendants used their authorized access to computer systems to download and retain confidential AMD information which they retained when they left to go work at Nvida. The complaint, while alleging the defendants had the intent to defraud AMD, provided no facts which support the allegation that the defendants obtained the information through fraudulent or deceptive methods.

Judge Hillman did not outright dismiss the claim given the truncated evidentiary record and has allowed AMD the opportunity to plead specific details indicating that some or all of the defendants used fraudulent or deceptive means to obtain the confidential information and that they intentionally defeated or circumvented technologically implemented restrictions to obtain the confidential information. If other judges in the 1st Circuit follow Judge Hillman’s approach, plaintiffs will need to ensure that they plead with sufficient detail that the defendants obtained the information through a fraudulent or deceptive method as opposed to simply obtaining the information through permissible access.

Future of Tribal Internet Gaming Subject of Oversight Hearing

 
 
 
On November 17, 2011, the Senate Committee on Indian Affairs is conducting an oversight hearing to discuss the future of tribal Internet gaming. There are several witnesses from government regulatory agencies, tribal governments and gaming associations, and the gaming industry who will offer testimony regarding the use of the Internet to serve tribal gaming operations in the future. The Internet is a largely unregulated medium which has seen increased use by commercial interests to conduct business operations and exchanges. Recently, in the case of Comcast v. FCC, the federal Court has held that the FCC lacks the ability under the FCC’s ancillary authority in the Communications Act,to regulate Internet Service Providers like Comcast. In the Comcast case, the FCC attempted to prevent Comcast from using network management operations which allegedly excluded non-Comcast applications from its Internet network. Comcast challenged the assertion of FCC authority in regard to regulating the Internet under the Communications Act. Prior to this case, the FCC classified the Internet as an informational service as opposed to a common carrier like a traditional telephone company. Under the Communications Act and FCC regulations, a common carrier is subject to a wider range of FCC regulation than is an informational service. The decision by the Court in Comcast upheld the classification of the Internet as an informational service and as a result, the Court determined that the FCC had no authority to regulate the Internet, such that it could impose punitive action against an Internet Service Provider such as Comcast.On a similar front, states are generally allowed a minimal role in regulation of the Internet. States are permitted to regulate the Internet only so far as the action to be regulated occurs entirely within the state and the action does not involve interstate commerce. Thus, many tribes are not subject to state regulatory jurisdiction when it comes to the Internet. A question which may be raised as a part of the discussion about to occur in the Senate this week should involve the ability of the states to regulate gaming if it occurs over the Internet on an Indian Reservation or gaming facility. The push to regulate Internet gaming may also raise questions about the Communications Act and whether it will have to be amended to allow federal agencies an expanded role in regulating the Internet. There are no Internet Service Providers who appear to be testifying at the upcoming Senate hearing and it would likely be prudent at some point to include them in future discussions. After all, it is the Internet Service Providers who will provide gaming operations with the connectivity to the Internet, service the Internet connections to ensure reliability and speed, and most importantly, provide the necessary Internet security to prevent cyber attacks or the loss of customer personally identifiable information.

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