Many tech companies consider themselves a service provider exempt from sales and use tax. But the 2018 Wayfair decision expanded the definition of nexus and and more of these businesses are now subject to sales and use tax collection, including on one of their product staples: apps.A mobile application, or app, is a program or software application to run on a mobile device. Designed once upon a time as just a helpmate to desktop computing, they’ve expanded into almost all areas of computing. Today there are more than 7 million apps, and counting. Some are free but many aren’t.
What about the sales tax?
Definitions and diverse rules
Most tangible personal property (TPP) incurs sales tax in most states. However, digital products are sent electronically and states differ in the way they tax these “intangible” products. These products can include digital books, music, internet TV and streaming media, webinars, subscriptions, software and apps, among other products.
States tackle the taxation of digital goods and services in a bewildering number of ways, and they are even less clear on how sales tax applies to apps. For example, Alabama and Arizona consider digital apps TPP, and so clearly taxable. Most states and the District of Columbia tax sales of digital products, usually including apps. (In some states, such as Colorado and even Alaska, home rule statutes might also apply.)
Apps are specifically mentioned in the sales tax regs of D.C., Pennsylvania and the state of Washington (check thoroughly in the case of the latter), among many others. Sometimes special conditions apply, as in Mississippi if the app is sold as part of the purchase of canned software. Maryland (a state famous for spearheading efforts to levy sales tax on digital advertising) also recently broadened its sales and use tax definition to include apps. Hawaii and Connecticut are two other states that cast the tax net wide when it comes to software and apps.
‘Subject to sales tax’
Apps will no doubt start appearing more and more in sales tax decisions involving digital products and delivery methods.
Sometimes apps don’t even have to be taxable in a state to make headlines. Recently the Massachusetts Supreme Judicial Court has accepted a direct appeal from an internet retailer contesting the state’s position that the in-state presence of cookies and apps were sufficient to satisfy the physical presence nexus standards in place prior to the 2018 Wayfair Supreme Court decision.
The Department assessed use tax on the basis that the cookies and apps placed on the devices of Massachusetts-based consumers was sufficient to create physical presence nexus. The Massachusetts Appellate Tax Board disagreed, determining cookies and apps did not satisfy the physical presence standard for pre-Wayfair periods, while also rejecting the Department’s position that Wayfair should be applied retroactively.
Two years ago, the Streamlined Sales Tax Governing Board presented a web of definitions used to determine if Wisconsin was correct in a then-recent tax determination. The state had taken the position that providing and hosting an online banking platform is subject to sales and use tax as telecommunications services despite the services meeting the definition of data processing and information services, which are exempt from Wisconsin sales and use tax.
And even if apps aren’t taxable now, this could change at any moment. Sales tax laws change often, so check in any state where you have sales tax nexus.
TaxConnex has helped companies in many industries alleviate the burden of sales tax. We are experts when it comes to navigating tax regulations. Contact us to learn more about how TaxConnex can take sales tax off your plate entirely.