Discover the common ways that online retailers create sales tax nexus and what to do to stay compliant
States have been tackling taxation of software and the cloud for quite some time and this trend has continued post-South Dakota v. Wayfair. In fact, a number of major pieces of legislation have become effective post-Wayfair across the states.
Let’s examine three examples of sales tax legislation pertaining to software and the cloud that have become effective post-Wayfair – in Iowa, D.C., and Rhode Island. If you conduct business in any of these states, you’ll want to be aware of these significant new sales tax changes and what actions you’ll need to take to stay compliant.
Effective January 1, 2019, Iowa enacted legislation that subjects specified digital products and services to state sales and use tax. “Specified digital products” means electronically transferred digital audio-visual works, digital audio works, digital books, or other digital products.
Some of those digital products are pretty clear cut, but what is the state considering “other digital products?”
“Other digital products” means greeting cards, images, video or electronic games or entertainment, news or information products, and computer software applications. Digital codes are also now taxable if the item to which the code applies is taxable. The definition of sales was also amended to include subscriptions.
The legislation also expands taxable services to include streaming video, video on-demand and pay per view as part of pay television. Think services like Netflix, HBO GO, or online movie rentals. Storage of tangible or electronic files, documents or other records; information services and Software as a Service (SaaS) are all new taxable services. Like that extra cloud space you’re paying for with Apple? It’s now subject to tax.
Services arising from or related to installing, maintaining, servicing, repairing, operating, upgrading, or enhancing specified digital products are also taxable.
The legislation also creates exemptions for certain sales of specified digital products, prewritten computer software and enumerated services. A key exemption is for sales of many of these otherwise taxable digital goods and services to a commercial enterprise for use exclusively by the commercial enterprise. This results in the most significant impact on this law change to individual consumers rather than business. For more details on the exemptions, see our news item.
This legislation has greatly expanded Iowa’s tax base, subjecting many new items to Iowa sales and use tax, effective January 1, 2019. If you make sales of any of the above items into Iowa, you’ll now need to charge, collect and remit Iowa sales tax on the sales, unless an exemption applies.
Note that this legislation – S.F. 2417 – also includes remote seller nexus provisions that became effective January 1, 2019 which will subject sellers of these newly taxable digital goods to registration and collection of the Iowa sales tax. For more details, see our news item.
Iowa isn’t the only state to start taxing digital goods in the new year. The District of Columbia has passed legislation stating that sales of digital goods into the District are subject to sales and use tax, effective January 1, 2019. Digital goods that are now subject to District of Columbia sales and use tax include:
These categories encompass many different items that you may sell or purchase.
For example, “digital audio visual works” includes items like movies, videos, news and entertainment programs, and more. “Digital audio works” includes music, readings of books, and even ringtones, among other items. “Digital applications and games” mean any application or game, including add-ons or additional content that can be used by a computer, mobile device, or tablet.
The legislation states that digital goods are subject to taxation whether they are purchased singly, by subscription, or in any other manner. Purchases of maintenance, updates, and support for digital goods are also subject to D.C. sales and use tax.
Per the legislation, “digital goods” does not include cable television service, satellite relay television service, or any other distribution of television, video, or radio service subject to tax under Section 47-2501.01. In addition, Internet access service does not include digital goods.
If you make sales of digital goods into the District of Columbia, this is a significant legislative change. Similarly to Iowa, the District also enacted remote seller legislation effective January 1, 2019 so sellers of these digital goods now have to start collecting tax. See our news item. You’ll now need to ensure that you are properly charging, collecting and remitting sales tax on sales of digital goods into the District of Columbia.
Effective October 1, 2018, Software as a Service (SaaS) is subject to Rhode Island’s 7% sales and use tax. Tax applies to SaaS regardless of whether access to or use of the software is permanent or temporary, and regardless of whether it is downloaded.
Here are a few examples of taxable purchases under the recently enacted legislation:
In general, the seller is responsible for collecting and remitting the tax on these sales. If the seller does not charge tax, the consumer is responsible for paying the tax. So whether you are the seller or purchaser of SaaS in Rhode Island, you need to be aware of your obligations and act accordingly.
Note that the purchase of e-books, digital videos, and/or digital music products – whether downloaded or streamed –continue to be exempt from sales tax.
Iowa, Rhode Island and the District of Columbia are not the only jurisdictions who have recently enacted legislative changes for software and cloud taxation. The states are constantly assessing their position on the taxation of these items and passing new legislation to stay current.
In addition to staying on top of legislative changes, it’s crucial to be fluent in the sales and use tax treatment of software and the cloud. As you can see in the three examples above, each state has their own interpretation of what constitutes a taxable software, digital, and cloud good/service.
There are so many variations in how these types of products and their accompanying services can be delivered, and the tax treatment can vary depending on a huge number of factors. Not treating these sales correctly for sales and use tax purposes is very easy to do but can lead to big, costly mistakes.