Pub. 3 2021 Issue 2

11 nebraska society of cpas W W W . N E S C P A . O R G As with all tax matters, state and local taxes and incentives offer the opportunity to choose to plan ahead or to choose to not plan ahead. Planning ahead usually results in the better outcome. Below are several of the planning opportunities that state and local tax professionals are addressing during the life of a business or individual, and which we are seeing in audits and appeals, when not properly addressed early on. Issue: Sales Tax on Software Development Problem: The Nebraska Department of Revenue won’t recognize that custom software developed by outside firms for a company is exempt from sales tax, unless the software development agreement meets a three-factor test for the developers to be treated as “temporary employees” of the company for sales tax purposes. NDRRev. Rul. 1-2-1. What to Do: If a company very precisely includes the three factors for temporary employees in its sof tware development agreement, it may avoid Nebraska sales tax on that development. Audits and appeals usually center around proving the agreement complies and that various contract terms or company practices don’t contradict this. The three-factor test is actually a “safe harbor,” which enables other factors and legal grounds to apply if this safe harbor is not met. Issue: Tax on Cloud Computing Problem: The Nebraska Department of Revenue has, in multiple matters we have been asked to help resolve, alleged that sales tax is due on a part of cloud computing charges. The department’s contention was that otherwise tax-exempt cloud computing was protected by certain levels of otherwise taxable security measures. What to Do: If cloud service contracts are carefully drafted, a company may reduce or eliminate the portion of cloud computing charges that the department alleges are subject to the sales tax on security services. On audit or appeal, we are addressing the legal position that security is an integral part of the cloud service and should not be parsed and taxed. Issue: Nebraska Residency for Income Tax Purposes Problem: The Nebraska Department of Revenue routinely follows individuals who move outside of Nebraska to attempt to classify these persons as still being taxable residents. What to Do: If your client intends to move out of state to nonresident status, the 12 principal factors for determining a person’s resident or nonresident status should be addressed and documented during the move. Frequently, individuals will want to retain certain Nebraska connections (such as home or business ownership) which the Department of Revenue uses against you. On audit or appeal, we usually find the taxpayer hasn’t met all of the 12 factors or kept the documents to best prove this, so this often becomes a matter of legal positioning and settlement. Issue: Nebraska Tax for Trusts Administered Elsewhere Problem: Nebraska’s statutes impose tax on trusts created by a Nebraska resident. This may not be constitutional for trusts administered outside Nebraska.