If you were to read our 5 Steps to Sales Tax Compliance, or any guide on maintaining sales tax compliance, understanding the taxability of your products and/or services would be one of the first steps.
Taxability could be a simple analysis if you sell widgets as tangible personal property (TPP) is taxable unless specifically stated otherwise.
Taxability becomes confusing with software which tends to have varying tax rules from state-to-state. Is it SaaS-based? How is it delivered? Are there maintenance or support services included with the software? Is the maintenance or support optional or mandatory? All of those questions are relevant when determining whether sales tax applies in a certain state. Similarly, taxability is confusing for a service like telecommunications services, which can be subject to sales tax and communications taxes.
Generally, digital products are “intangible” and sent to your customers electronically. These products can include digital books, music, internet TV and streaming media, webinars, subscriptions, and apps, among many other products. So not taxable, right? Not always the case.
The U.S. has no uniform sales tax on digital items, though periodically there are attempts to firm up guidelines, such as the “Digital Goods and Services Tax Fairness Act of 2018” which failed to progress through the legislative branch. Federal regulation regarding digital sales nationwide generally attempts to pin down the appropriate tax jurisdiction – location of the sale, of the seller, of the consumer and so on – as well as the tax rate.
“There is substantial risk that without a national framework, multiple states and localities will claim they have authority to tax the same digital transaction,” reads the primer for the “Digital Goods and Services Tax Fairness Act of 2019,” sponsored by Sen. John Thune (R-SD) and Sen. Ron Wyden (D-OR) which also failed to make it through the legislative branch.
Slightly more than half the states now tax sales of digital products. Some states tax ringtones as digital products and some don’t. North Carolina imposes tax on sales of e-delivered greeting cards and photographs. Nebraska taxes sales of “content cards” or “digital release cards” that allow purchasers to download specific digital goods if the product is taxable in other circumstances.
Some states like Alaska don’t have a general sales tax at all, but in that state localities are banding together to impose sales tax on products sold over the internet. Connecticut recently hiked its sales-tax rate from 1% to 6.35% on most digital goods sold to consumers while maintaining the reduced rate of 1% when sold to businesses. Some states have no definition of “digital” product or goods. Others use the Streamlined Sales Tax definition from the Streamlined Sales Tax Governing Board. Still other states have their own definitions and conditions of taxability of digital products. In Indiana, “specified digital products” includes digital audio works, digital audiovisual works, and digital books electronically transferred.
For many, understanding taxability can be easy, but for digital products and technology-based solutions, your answers aren’t as cut and dry. State departments of taxation and revenue are good sources of information for the latest digital taxation developments. The Federation of Tax Administrators also provides updates.
If you’re looking to get a better understanding of your taxability, contact TaxConnex to learn about our taxability reviews and other compliance services.