Companies and individuals sell an astonishing assortment of services: sand raking, dice inspecting, worm catching, and holding up cyclists’ bikes before a race. They sell chicken feet, lunch with Warren Buffet, and the meaning of life (purchased off eBay for $3.26). It’s an amazing, enterprising world. No matter what your company sells, it’s essential to get sales and use tax right. Tax obligations vary by industry, and according to the goods and services each industry sells. They’re impacted by location, the nature of the transaction, and even the consumer. Getting tax right is challenging, particularly for companies with an obligation to collect in multiple jurisdictions. It’s even more difficult when the tax authorities themselves don’t know whether or not tax should apply. If they don’t know, how are you expected to get sales tax right?
The harder it is to categorize products and services, the more challenging it is to understand how existing tax rules apply to them. Should animal blood be taxed or exempt in California? How about tree removal services in parts of South Dakota plagued by pine beetles? Tools lost down holes in Wyoming? Believe it or not, these have all been topics of discussion in state legislatures.
This challenge of categorizing goods and services is compounded by advances in technology, which are responsible for such category-straining creations as digital goods and services. In a few short years, for example, technology has changed how we consume our news. Paper newspapers are increasingly being put aside in favor of online newspapers. This affects subscriptions, which impacts sales tax revenue, which alerts state tax departments and lawmakers of a need for a change. To wit, the California Board of Equalization recently updated its tax policy regarding electronic and paper newspaper subscriptions.
Digital downloads, such as e-books, may no longer be considered cutting edge, but they are still an area of inconstancy in the world of state sales tax. Some states, including New York, don’t tax e-books and other digital downloads because they don’t consider them to be tangible personal property. Yet Pennsylvania recently chose to tax digital downloads in the face of a credit down grade and a blooming deficit. Numerous other states, including Tennessee and Vermont, are still grappling with whether or not to tax digital goods and cloud computing services. Others, like Michigan, rely on Department of Revenue rulings to set tax policies related to this area.
Software has been around long enough that you’d think it would cause little confusion with respect to sales and use tax. And yet state tax departments are repeatedly asked to clarify their policies. Just last summer, The Virginia Tax Commission ruled that invoices for electronically delivered software must make clear that no software in tangible form was provided; without that proof, sales tax could apply. The addition of cloud computing services has only complicated the issue and created additional discrepancies between jurisdictions. For example, Vermont removed a tax on cloud computing services last year, about the same time Chicago was preparing to enforce compliance with its tax on certain cloud computing services.
There are three primary ways that growing software companies trigger a change in their requirements for collecting and remitting sales tax, and they are common in other types of businesses as well. These changes are related to new nexus requirements, financing and valuation events, and new product and services taxability issues.
Learn more about common triggers all growing companies face, why these triggers make sales and use tax compliance difficult to manage, and how to avoid the related headaches in the new paper from Avalara, Managing Sales Tax in a Digital World.