The short answer: maybe. What’s an IP address and how can it influence your company’s need to collect and remit sales tax to states?
When your customers access your website and make purchases, the customer is often providing a billing and/or shipping address which can be used to determine where sales tax applies. In certain online transactions, these physical addresses may not be available. As a result, an Internet Protocol (IP) address may be all that’s available. The IP address of the computer being used to access your website can be identified and via third party databases, the IP address can be mapped to a physical address for purposes of applying sales tax.
Tech on the forefront
This becomes especially important for technology companies, which at one time (like many companies) viewed their sales tax footprint as limited to their state of headquarters.
Many tech companies also consider themselves a service provider and therefore exempt from sales and use tax. But in light of the 2018 Wayfair decision and an expanded definition of nexus, more of these businesses are now subject to sales and use tax collection on these services, including but not limited to software delivered electronically, “software as a service” (SaaS), cloud-based solutions, VoIP, streaming media, and various gaming apps.
Most technology and software companies do not need to track the IP address because a billing address is provided. But for example a purchase within an app or gaming system may not require the same amount of information, so understanding where the purchase is being used is harder to pin point – in these cases, an IP address can be used in certain situations.
Texas and Maryland
As global governments begin to increasingly view digital services as taxable, American states are starting to jump on the band wagon. A measure using IP addresses to track the location of sales does appear to have been upheld from a recent digital-advertising bill in the Maryland Senate.
An out-of-state seller can use a customer’s registered IP address to source sales for Texas sales tax purposes, however, sourcing the sale based on the physical address associated with the registered IP address.
Separately, in a Texas private letter ruling from 2017, Texas determined that the IP address was acceptable for identifying the location in which sales tax applies. The taxpayer (a Nevada-based tech company selling such services as VoIP calling, Wi-Fi, and text, video, and instant messaging in Texas) does not require a user to provide a billing, residential, or business address. When users register for an account, the taxpayer retains the user’s Internet protocol address or IP address. Then the taxpayer uses a third-party service to link the IP address to a physical address, according to news reports.
“Prepaid wireless telecommunications services purchased over the internet are sourced to Texas if the purchaser’s primary business address or residential address is in Texas,” reports said. “Users can supply address information when they register for an account or purchase services, Taxpayer does not require Users to supply a billing address, residential address, or business address, and does not check the accuracy of User-supplied information.”
The Nevada vendor did add that “the Registration IP address is more reliable than User-provided information” in tracking the physical location of a customer.”
Where there are two states, there may soon be more – especially as the pandemic continues to ravage state tax revenues. Stay tuned.
TaxConnex has worked to assist technology companies alleviate the burden of sales tax for many years. We are experts when it comes to navigating tax regulations for these types of products and services. Contact us to learn more about how TaxConnex can take sales tax off your plate entirely.