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Batten Down the Hatches: Digital Tax Nor’easter Coming This Fall

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. Connecticut Governor Ned Lamont (D) signed the Connecticut budget bill (HB 7424) into law in early June. The bill contains language increasing the sales and use tax rate on most digital goods and services from the current 1% rate to the full 6.35% rate beginning October 1, 2019. See Sections 319-322 (starting on page 460 of the Public Act). Specifically, these provisions expand the definition of “tangible personal property” for sales and use tax purposes so they include: (1) “digital goods” and (2) “canned or prewritten software...

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Kentucky to Begin Taxing Video Streaming Services under Telecom Tax

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...

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Nevada Bill Proposes Broad New Excise Tax on Sales of Digital Goods and Services

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...

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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...

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Nexus is Crucial, Complex Connection for State Tax Professionals

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. Read the full article. Reprinted with permission. Originally published in TEI Magazine, ©2017.

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Tennessee SaaS Ruling Highlights Telecommunications Concerns for SaaS Providers

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...

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