Sales and Use Tax Changes in the Digital World

December 8, 2014

Taxability of Goods and Services Sold Online As recent election results have shown, there are few things that states can agree on and the taxability of goods and services sold online is no different. As brick and mortar stores continue to compete with online sales, state legislatures are starting to catch up with laws regarding the taxability of online sales, but there is little uniformity. Some states have added new codes, statutes and regulations to deal with transactions within the digital realm while other states still have not specifically addressed these issues in their laws. For states that have yet to specifically address the taxability of digital transactions, telephone calls to state tax officials are required. Often states that do not have specific references to the taxability of digital goods in their laws will tax them anyway and offer legal citations to support their stances which do not reference digital transactions at all but give broad guidance on services and “tangible personal property.” Much of the confusion appears to reflect the interesting challenge that digital transactions present in a state tax system that has traditionally considered the taxability of goods in the context of “tangible personal property.” Webster’s Dictionary defines the word “tangible” as something that is “able to be touched or felt.” This kind of description presents complications within a digital context because something that is streamed or downloaded from a computer cannot be touched or felt, thus escaping the traditional concept of a taxable good. To remedy this gap in many states’ laws, there has been a gradual shift towards states specifically addressing the taxability of digital goods and services. Capturing Tax Dollars from Digital Transactions As things stand, we appear to be approaching the moment when a majority of states will have laws in place to capture tax dollars from digital transactions that would have been taxable if the transaction of the good took place in a brick and mortar store.  To illustrate this development, I recently researched the taxability of tutoring services offered online with varying degrees of property included on an invoice. The on-line tutoring service by itself was generally exempt from taxation as it would be if the service was conducted in person. The on-line tutoring service sold with tangible personal property was generally taxable as it would be in person. Additionally, there was relative uniformity in exempting an inconsequential amount of tangible or digital property when invoiced with the tutoring services. But in the situations in which on-line tutoring was sold with streamed or downloaded property, the states were pretty evenly divided. If several more states decide to tax digital goods like books, those states will be in the majority. The transition to generally taxing digital goods appears to be underway. Due to the transitory nature of these developments, companies would have a difficult time staying on top of new developments without the help of companies like Taxware. Like death and taxes, change is certain.

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Sovos was built to solve the complexities of the digital transformation of tax, with complete, connected offerings for tax determination, continuous transaction controls, tax reporting and more. Sovos customers include half the Fortune 500, as well as businesses of every size operating in more than 70 countries. The company’s SaaS products and proprietary Sovos S1 Platform integrate with a wide variety of business applications and government compliance processes. Sovos has employees throughout the Americas and Europe, and is owned by Hg and TA Associates.
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