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The contents of this whitepaper are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney or tax professional to obtain advice with respect to any particular issue or problem. Sponsored by Avalara, Inc. Copyright 2013
The origin of todays sales tax laws occurred in the early 1900s when U.S. commerce was predominantly expressed in tangible goods.
For the most part, all consumer spending was for items with physical qualities, or things that could be weighed, packaged, mailed, carried or driven. The body of sales tax law we live and work with today is based on original statutes whose logic and drafting style adhered to the predominant model of their time and focused exclusively on sales of tangible goods. At the time, no one envisioned a society where services were equally valued as products, let alone products and services delivered in cyberspace. Around the second half of the last century, a significant portion of consumer spending shifted to services where the value elements are intangible, including specialized training, experience, even raw hours and complex projects. Since a customers object in purchasing a service is intangible, sales tax law slowly but steadily followed the shift in consumer preferences. By 2013, many states routinely apply sales taxes to services, yet the shift in consumer spending leaves us a body of sales tax laws originally drafted with tangible goods in mind that are now regularly, if not uniformly, applied to intangible services.
Definitions
Many states make some allusion to digital goods in their body of legislative and administrative law. In addition, the Streamlined Sales Tax Governing Board has made the identifying and defining of digital products a cornerstone of their effort. There are three categories of states approaches in defining digital goods: 1. States that specifically define digital goods on their books through their adoption of SST model legislation. 2. States that define digital goods through laws, regulations or informational documents, often relating digital goods to existing sales tax objects. 3. States that have not defined digital goods for sales tax purposes to any level of usefulness.
Definitions (continued)
Here are the 12 states that utilize the SST definition of specified digital goods: Indiana2 Kentucky3 New Jersey4 Nebraska5 Nevada6 North Dakota7 8 Rhode Island Tennessee9 10 Vermont Washington11 12 Wisconsin Wyoming13
Definitions (continued)
Michigan. Michigan defines digital goods within its section on telecommunication services law. Note the law here specifically omits digital goods from the category of telecommunications services, but the definition is helpful. Michigan law states digital products <are those products> delivered electronically, including, but not limited to, software, music, video, reading materials or ring tones.21 Minnesota. Minnesota defines digital goods within its section on telecommunication services law. Note the law here specifically omits digital goods from the category of telecommunications services, but the definition is helpful. Minnesota law states digital products <are those products> delivered electronically, including, but not limited to, software, music, video, reading materials or ring tones.22 Maine. Maine defines digital goods within its section on telecommunication services law. Note the law here specifically omits digital goods from the category of telecommunications services, but the definition is helpful. Maine law states digital products <are those products> delivered electronically, including, but not limited to, software, music, video, reading materials or ring tones.23 Mississippi. Mississippi is not a member of the SST, but the state uses a similar definition structure for digital goods as SST: Specified digital products means electronically transferred digital audio-visual works, digital audio works and digital books.24 North Carolina. In North Carolina, digital property includes items delivered or accessed electronically an audio work; an audiovisual work; a book, magazine, newspaper, newsletter, report or other publication; or a photograph.25 Ohio. Ohio defines digital goods within its section on telecommunication services law. Note the law here specifically omits digital goods from the category of telecommunications services, but the definition is helpful. Ohio law states digital products <are those products> delivered electronically, including software, music, video, reading materials or ring tones.26 Oklahoma. Oklahoma defines digital products: digital products delivered electronically include music, video, ringtones, and books.27 Texas. Texas defines digital goods as tangible property. Digital products, such as photographs and music are tangible personal property as defined in Section 151.009 of the Texas Tax Code.28 West Virginia. West Virginia defines digital goods within its section on telecommunication services law. Note the law here specifically omits digital goods from the category of telecommunications services, but the definition is helpful. West Virginia law states digital products <are those products> delivered electronically, including, but not limited to, software, music, video, reading materials or ring tones.29
Definitions (continued)
C. States That Do Not Specifically Define Digital Goods for Sales Tax Purposes.
Here are the 18 states that fall into this category: Alabama. Alabama law does not specifically define digital goods for sales tax purposes. In Alabama, tangible property is described as personal property which is in any manner perceptible to the senses.30 Arizona. Arizona law does not specifically define digital goods for gross receipts tax purposes. In Arizona, tangible property is described as personal property which is in any manner perceptible to the senses.31 California. California does not specifically define digital goods for sales tax purposes. Colorado. Colorado does not specifically define digital goods for sales tax purposes. The Colorado definition of tangible personal property is limited to corporeal personal property.32 District of Columbia. DC does not specifically define digital goods for sales tax purposes. The DC definition of tangible personal property is limited to corporeal personal property.33 Florida. Florida does not specifically define digital goods for sales tax purposes. In Florida, tangible personal property is property which is in any manner perceptible to the senses.34 Hawaii. Hawaii does not specifically define digital goods for sales tax purposes. Idaho. Idaho does not specifically define digital goods for sales tax purposes. Maryland. Maryland does not specifically define digital goods for sales tax purposes. In Maryland, tangible property is corporeal personal property of any nature.35 Massachusetts. Massachusetts does not specifically define digital goods for sales tax purposes. Missouri. Missouri does not specifically define digital goods for sales tax purposes. New Mexico. New Mexico does not specifically define digital goods for sales tax purposes.
Definitions (continued)
New York. New York does not specifically define digital goods for sales tax purposes. Pennsylvania. Pennsylvania does not specifically define digital goods for sales tax purposes. South Carolina. South Carolina does not specifically define digital goods for sales tax purposes. South Dakota. South Dakota does not specifically define digital goods for sales tax purposes. Utah. Utah does not specifically define digital goods for sales tax purposes. Virginia. Virginia does not specifically define digital goods for sales tax purposes.
Taxability
Based on the list of states in the three categories, there are about 65% of states have some definition of digital goods for sales tax purposes, either by explicit definition, by including them specifically in the category of tangible property or by referring to their exclusion from telecommunications services. In defining digital goods, some states answer the question of what are digital goods? with precision, some do not. Once we have the tools available to define or identify digital goods for sales tax purposes, the next critical, but still basic, question is whether to tax? Note from the results below that a states ability to positively define digital goods is not necessarily related to how that state taxes or not taxes digital goods. Clearly, some states dissect the issue to an even greater degree and there are many, many gray areas. For example, digital photographs are carved out in some states. Other questions such as whether a digital good is transferred permanently, whether a digital good is subject to a subscription contract or whether a digital good is delivered with the aid of a physical storage device can all impact specific taxability of specific digital products in specific states. It is strongly recommended each vendor consult with a tax professional to determine the precise treatment required for your products in the states where you sell. While this whitepaper is only meant as a guide, this information will hopefully trigger some good conversation and deeper understanding. Once again, there are three rough categories to help understand the varying treatments given by the states in taxing (or not taxing) digital goods: 1. States that specifically tax digital goods on their books in law and regulation. 2. States that tax some or all digital goods, often relating the taxability of digital goods to existing sales tax laws originally meant to cover other products. 3. States who do not tax digital goods.
Mississippi. Mississippi imposes its gross receipts tax Upon every person engaging or continuing within this state in the business of selling, renting or leasing specified digital products. Nebraska. Nebraska law applies sales taxes to sales of digital goods as of June, 2011. New Jersey. New Jersey law applies sales tax to The receipts from every retail sale of a specified digital product for permanent use or less than permanent use, and regardless of whether continued payment is required, except as otherwise provided in this act. North Carolina. North Carolina law applies sales taxes to any product delivered electronically that would be taxable if delivered in tangible form, specifically including digital products as defined. Tennessee. Tennessee law states The retail sale, lease, licensing, or use of specified digital products transferred to or accessed by subscribers or consumers in this state shall be subject to the sales tax. Vermont. Vermont law applies sales tax to specified digital products transferred electronically to an end user regardless of whether for permanent use or less than permanent use and regardless of whether or not conditioned upon continued payment from the purchaser. Washington. Washington law defines the category of taxable retail sales to include sales to consumers of digital goods. Wisconsin. Wisconsin law applies sales tax to the sale, lease, license, or rental of specified digital goods and additional digital goods at retail for the right to use the specified digital goods or additional digital goods on a permanent or less than permanent basis and regardless of whether the purchaser is required to make continued payments for such right. Wyoming. Wyoming law states: The sale of specified digital products as defined in W.S. 39-15-101 is subject to sales tax when the product is transferred for permanent use to the taxpayer.
States Taxing Some or All Digital Goods in the Absence of Boilerplate Definitions
Here are the 15 states that fall into this category: Alabama. When it comes to digital photographs specifically, Alabama regulations identify the digital files as tangible property and thus taxable. Based on these regulations and the broadly interpreted Alabama definition of tangible
personal property, digital goods are generally considered taxable in Alabama. Arkansas. Arkansas taxes digital audio-visual works and digital audio works only when there is a sale of a subscription for digital audio-visual work and digital audio work to an end user that does not have the right of permanent use granted by the seller and the use is contingent on continued payments by the purchaser. Arizona. Arizona broadly defines tangible personal property. Digital goods are considered included in that definition by Arizona DOR and are taxable in Arizona as tangible personal property. Colorado. Colorado does not define digital goods nor affirmatively tax them. Note though, Colorado does consider electronic versions of otherwise taxable newspapers or magazines to be tangible personal property and <thus> taxable. The class of taxable newspapers in Colorado is somewhat limited but the existence of the taxable class of digital goods is instructive. Connecticut. Connecticut specifically taxes electronically delivered periodicals and digital downloads. Connecticut treats these sales of digital goods as computer and data processing services, subject to a reduced rate of 1%. Hawaii. Even in the absence of a specific description of digital goods, Hawaiis regulations plainly state that Hawaii law subject<s> virtually every economic activity to the general excise tax. Idaho. Idaho subjects digital goods to sales tax. See proposed clarification of Idaho regulations: This rule clarifies that digital goods accessed remotely (i.e. over the Internet or other network) are taxable. Kentucky. Kentucky law applies sales taxes broadly to digital property, which includes digital audio works and digital books. Note digital audio-visual works are excluded from the definition of digital property. Louisiana. Louisiana includes digital products in its category of taxable tangible property. Maine. Maine DOR states in an informational document: Digital products delivered or downloaded to a cellular telephone electronically, including music, video, text or ringtones are subject to the Sales and Use Tax. Missouri. Missouri DOR stated in a 2011 Letter Ruling that digital content associated with taxable software is taxable, while digital content associated with non-taxable software is exempt from sales tax. New Mexico. New Mexicos gross receipts tax has broad reach. In a 1997 informational document, the NM DOR stated any sale of information exchanged
between two computers represents a taxable event. South Dakota. South Dakota law applies sales tax to any sale of a product delivered electronically that would be taxable if delivered in tangible form. Texas. Texas law applies sales tax to digital goods if the items would be taxable if delivered in physical form. Digital products, such as photographs and music are tangible personal property as defined in Section 151.009 of the Texas Tax Code. Utah. Utah law applies sales tax to any product delivered electronically that is taxable if delivered by any other means.
Michigan. Michigan does not affirmatively tax digital goods. Electronically delivered software is taxable, but digital products are not included in the states definition of tangible property as software is. Minnesota. Minnesota does not affirmatively tax digital goods. New York. New York does not affirmatively tax digital products and the Dept. of Taxation and Finance has stated in several informational documents that specific digital goods are exempt. Nevada. Nevada does not tax products delivered electronically. North Dakota. North Dakota law states Gross receipts from the sale of specified digital products <are exempt from sales tax> Ohio. Ohio does not affirmatively tax digital goods. Oklahoma. Oklahoma does not affirmatively tax digital goods. Pennsylvania. Pennsylvania does not affirmatively tax digital goods. However, Pennsylvania DOR recently released a Letter Ruling indicating cloud based software and digital content are taxable when accessed in PA. Rhode Island. Rhode Island does not affirmatively tax digital goods. South Carolina. South Carolina does not affirmatively tax digital goods. Virginia. Virginia specifically exempts sales of digital products delivered electronically, such as software, downloaded music, ring tones, and reading materials. West Virginia. West Virginia does not affirmatively tax digital goods.
Footnotes
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SSUTA Library of Definitions Ind. Code 6-2.5-1-26.5 Ky. Rev. Stat. Ann. 139.010 N.J. Rev. Stat. 54:32B-2 Neb. Rev. Stat. 77-2701 Nev. Rev. Stat. 360B.483 N.D. Cent. Code 57-39.2-04 R.I. Reg. SU 11-25 Tenn. Code Ann. 67-6-102 Vt. Stat. Ann. 9701 Wash. Admin. Code 458-20-15503 Wis. Stat. 77.51 Wyo. Stat. 39-15-101 Ark. Code Ann. 26-52-301 Conn. Gen. Stat. 12-407 Ga. Code Ann. 48-8-2 Iowa Admin. Code 701--231.14 (423) Ill. Admin. Code 130.2105 Kan. Stat. Ann. 79-3602 La. Admin. Code 61:I.4301 Mich. Comp. Laws Ann. 205.93c Minn. Stat. 297A.61 Me. Rev. Stat. Ann. 2551 Miss. Code Ann. 27-65-26 N.C. Gen. Stat. 105-164.4 Ohio Rev. Code Ann. 5739.01 Okla. Admin. Code 710:65-19-156 Texas DOR Policy Letter 200005359L W. Va. Code 11-15B-2b
30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52
Ala. Code 40-12-220 Colo. Rev. Stat. 39-26-102 D.C. Code Ann. 47-2001 Fla. Stat. 212.02 Md. Code Ann. Tax-Gen. 11-101 Ind. Code 6-2.5-4-16.4 Miss. Code Ann. 27-65-26 Neb. Admin. R. & Regs. 1-045 N.J. Rev. Stat. 54:32B-3 N.C. Gen. Stat. 105-164.4 Tenn. Code Ann. 67-6-233 Vt. Stat. Ann. 9771 Wash. Rev. Code 82.04.050 Wis. Stat. 77.52 Wyo. Rules Dept. Rev. 15 Ala. Admin. Code 810-6-1-.119 Ark. Code Ann. 26-52-301 Ariz. Rev. Stat. Ann. 42-5001 Col. DOR Informational Letter No. GIL-11-014, 07/29/2011 Colo. Code Regs. 1 CCR 201-5:SR-32 CT DOR Policy Statement PS2006(6) CT DOR Taxpayer Answer Center FAQ #750. www.askdrs.ct.gov Viewed March 12, 2013. Ibid Haw. Admin. Rules 18-237-1 IDAHO STATE TAX COMMISSION COMMISSIONERS OPEN MEETING MINUTES OF MEETING HELD 2/6/13. www.tax.idaho.gov Viewed March 25, 2013 Ky. Rev. Stat. Ann. 139.200
57 58 59 60 61 62 63 64 65 66
La. Admin. Code 61:I.4301 Maine DOR Instructional Bulletin #56 Missouri DOR Letter Ruling LR 6866 8/17/11 New Mexico Ruling 401-97-6 S.D. Codified Laws 10-45-2.4 Texas DOR Policy Letter 200005359L Utah Code Ann. 59-12-103 CA BOE Informational Pub. 109 D.C. Code Ann. 47-2001 Example see: FL DOR Technical Assistance Advisement (TAA) 10A-028 Iowa Admin. Code 701--18.61 (422, 423) Ill. Admin. Code 130.2105 Kansas DOR Information Guide EDU-71R 07/23/10 MA DOR Tax Information Release TIR-05-8 07/14/05 Mich. Comp. Laws Ann. 205.51a ie: New York Advisory Opinion TSB-A-12(26)S 10/15/12 ; TSB-M-11(5)S 4/7/11 Nevada DOR FAQ http://tax.state.nv.us/About%20 taxes%20and%20Faqs.html Viewed March 20, 2013 N.D. Cent. Code 57-39.2-04 Okla. Admin. Code 710:65-19-156 PA DOR Letter Ruling SUT-12-001 5/31/12 Va. Code Ann. 58.1-648
67 68 69 70
71 72
73
74 75 76 77
53 54 55
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Author: Shane Ratigan began his career as a self-employed business owner. After 10 years in the motorcycle business, he returned to college to gain a Bachelors in Accounting and a Bachelors in Business Administration. He went on to earn his Juris Doctorate at Syracuse University College of Law in New York and his LLM Masters of Taxation at the University of Washington in Seattle. Shane has spent several years counseling small business owners on tax and succession planning. He is a licensed attorney in Oregon and Washington. Shane currently works in sales tax law and sales tax compliance with Avalara, a Software-as-a-Service end-to-end sales tax solution for businesses of all sizes.
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