Recently passed budget legislation in both Connecticut and Rhode Island included tax increases on sales of digital goods and services. The Connecticut bill has been signed into law. The Rhode Island bill passed late last night awaits executive action. Below are brief summaries of the impacts of these bills on the sales taxation of digital goods and services (assuming the Rhode Island governor signs the bill) beginning October 1, 2019.
Legislators in Frankfort added a new “video streaming service” tax to the omnibus tax bill (HB 354) as part of a closed-door conference committee process before the bill was hastily passed in the House and Senate. Notably, the new video streaming service tax was not previously raised or discussed as part of HB 354 (or any other Kentucky legislation) before it was included in the final conference committee report that passed the General Assembly in March.
Specifically, as passed by the General Assembly, HB 354 will add “video streaming services” to the definition of “multichannel video programming service” subject to the telecom excise tax. This is the same tax imposition that the Department of Revenue argued applied to video streaming services in the Netflix litigation—an argument that was rejected by the courts in Kentucky and then subsequently settled on appeal. Under existing law, Kentucky taxes “digital property” under the sales and use tax. The term is broadly defined and applies to audio streaming services, but expressly carves out “digital audio-visual works” (i.e., downloaded movies, TV shows and video; defined consistently with the SSUTA) from the scope of the sales and use tax imposition. HB 354 would not modify the treatment of digital goods and services under the sales and use tax, and changes that would be implemented are limited to the telecom excise tax imposed on the retail purchase of a multichannel video programming service. (more…)
A bill (AB 447) was introduced on March 25th in the Nevada Assembly that would create a broad new excise tax on the retail sale of “specified digital products” to Nevada customers. Instead of expanding the scope of Nevada’s sales and use tax, the bill would enact an entirely new chapter of the Revenue and Taxation Title imposing this new excise tax. Currently, sales of digital products, including electronic transfers of computer software, are not subject to the sales and use tax. Thus, the new proposal represents a major policy departure from the status quo. The introduced bill also would create inconsistencies with the Streamlined Sales and Use Tax Agreement (SSUTA)—to which Nevada is a member state—and contains many potential violations of federal law under the Permanent Internet Tax Freedom Act (PITFA) that do not appear to have been carefully considered.
Broad New Tax
Specifically, the bill would impose the new excise tax “upon the retail sale of specified digital products to an end user in this State . . . [and] applies whether the purchaser obtains permanent use or less than permanent use of the specified digital product, whether the sale is conditioned or not conditioned upon continued payment from the purchaser and whether the sale is on a subscription basis or is not on a subscription basis.” Based on this broad imposition, subscription-based services and leases or rentals of “specified digital products” would be covered by the new tax. “Specified digital products” is defined as “electronically transferred: (a) Digital audio works; (b) Digital audio-visual works; (c) Digital books; (d) Digital code; and (e) Other digital products.” Except for “other digital products,” these terms are defined consistently with the definitions in the SSUTA (of which Nevada is a member). The bill defines the term “other digital products” as “greeting cards, images, video or electronic games or entertainment, news or information products and computer software applications.” (more…)
Federal Digital Goods Bill: Rules of the Road for State Sales and Use Taxation of Digital Goods and Services
Today, US Senators John Thune (R-SD) and Ron Wyden (D-OR) filed the Digital Goods and Services Tax Fairness Act of 2018 (S.3581) for reintroduction in the United States Senate. A companion version is expected to be reintroduced tomorrow in the House of Representatives by Representatives Lamar Smith (R-TX) and Steve Cohen (D-TN). This bill, if enacted, would establish a national framework for how states apply their sales and use tax systems to sales and uses of digital goods and digital services. The bill would resolve current uncertainty regarding which state has the right to tax certain sales and whether a state has the right to tax the sale of a digital good or digital service. The bill also would establish uniform, destination-based, sourcing rules for sales of such products and services.
Sales of digital goods and services are highly mobile transactions. A customer could have a billing address in one state and download a digital good from the seller’s server in another state while the customer is traveling in a third state. Whether such a transaction has sufficient attributes in any one of the three states to give rise to the right to tax the transaction by any one of them is open to question. Assuming one of the states has the right to tax the sale, there is a question as to which state that might be. The bill would clearly specify that one of the states has the right to tax the sale and clearly delineate which state has such taxing rights. (more…)
With multiple state lawsuits, competing federal legislation, many state bills, and several rulings and regulations, the physical presence rule remains an important and contentious issue. In this article for the TEI magazine, Mark Yopp takes a practical approach for practitioners to deal with the ever-evolving landscape.
Reprinted with permission. Originally published in TEI Magazine, ©2017.
The Tennessee Department of Revenue recently released Letter Ruling No. 14-05, in which it considered whether certain cloud collaboration services are subject to the state’s sales tax. At a high level, the provider’s services are provided in a typical Software as a Service (SaaS) form: (1) the provider owns the hardware and software used to provide the services; (2) the software is installed on the provider’s servers; (3) the provider’s employees monitor and maintain the hardware and software; (4) the provider charges a customer a monthly user fee; and (5) customers remotely access the software (i.e., no software is ever downloaded by a customer). Of additional note, the provider does not license any of its software to the customers.
As the Tennessee Department has done in the past, it correctly determined that the SaaS arrangement does not constitute a retail sale of computer software because the provider “does not transfer title, possession, or control of any tangible personal property or software to a customer.” Instead, the provider “ultimately uses and consumes both hardware and software as a means of providing its services.”
However, the Tennessee Department found that the cloud collaboration services are subject to the state’s sales tax as telecommunications services or ancillary services to telecommunications. The cloud collaboration services instruct a customer’s telecommunications equipment as to how to process and route calls, “augment[ing] a customer’s voice, video, messaging, presence, audio/web conferencing, and mobile capabilities.” As such, Letter Ruling No. 14-05 highlights a major concern for SaaS providers: that their services will be considered taxable telecommunications or ancillary services. While the cloud collaboration services are perhaps more clearly telecommunications or ancillary services than others, many SaaS offerings include an element of telecommunications by the very nature of remotely accessed software.
Fortunately, there are strong arguments in many states for most SaaS offerings to be excluded from the definition of telecommunications or ancillary services. Streamlined Sales and Use Tax Agreement (SSUTA) member states (Tennessee is an associate member) are required to exclude “data processing and information services that allow data to be generated, acquired, stored, processed, or retrieved and delivered by an electronic transmission to a purchaser where such purchaser’s primary purpose for the underlying transaction is the processed data or information” from the definition of “telecommunications services.” Therefore, where a provider can demonstrate that the true object of its offering is data processing or information services—and that any telecommunications services are merely incidental to those services—the offering should not constitute taxable telecommunications services. In fact, demonstrating that the telecommunications component of any SaaS offering is merely incidental to the true object of the service should be effective in almost all states, SSUTA members or not. Therefore, to adequately defend against the concern that a SaaS offering will be considered taxable telecommunications or ancillary services, providers should ensure that the true object of their offering is apparent and that it is clear that any telecommunications component is provided solely to facilitate that true object.