Tangible personal property is the crux of sales tax application across the states. States generally tax anything that can be seen, weighed, measured, felt, touched, or is perceptible to the senses (barring real property like land and buildings).
Historically, intangible property – such as stocks, bonds, contracts, mortgages, patents, and copyrights – has not been subject to tax. However, this is not a definitive rule and the landscape is changing.
Intangible property can be considered tangible property in the eyes of the state if it is delivered in a tangible means. The waters can be muddied even further as states plan taxing approaches to new technologies, products, and services that are intangible or have intangible qualities. States want a bigger piece of the growing digital and service-based economy.
Uncertain future aside, let’s look at cases where seemingly intangible goods can be converted to tangible personal property for tax purposes so you can learn what can flip the switch for a transaction.
Software in itself seems intangible – lines of code are not palpable. However, the delivery method of software can have a significant impact on taxability.
The Streamlined Sales Tax Agreement includes prewritten computer software in its definition of tangible personal property but allows members to exempt prewritten computer software that is delivered electronically or by “load and leave” (for example, software delivered from a flash drive to a purchaser but the purchaser does not keep the flash drive).
Regardless of SST membership, states have varying opinions on the taxability of electronically delivered software, such as software downloaded from the Internet. Many states exempt sales of software transferred electronically since the software is not delivered in a tangible form and doesn’t meet the definition of tangible personal property. Others will tax prewritten computer software regardless of delivery method.
In California, the sale or lease of a prewritten program is not a taxable transaction if the program is transferred by remote telecommunications from the seller’s place of business, to or through the purchaser’s computer and the purchaser does not obtain possession of any tangible personal property in the transaction (California Sales and Use Tax Regulation 1502(f)(1)(D)).
In Illinois, pre-written canned (non-custom) software is considered to be tangible personal property regardless of the form in which it is transferred or transmitted, including tape, disc, card, electronic means or other media (Illinois Administrative Code, Title 86, Section 130.1935).
However, essentially all states tax the sale of canned software delivered in a physical format, such as on a disc, since most states tax sales of tangible personal property. Software delivered on something you can touch and hold changes the scenario.
In states that exempt electronically delivered software, it’s important to note that any transfer of tangible personal property as part of the electronic transaction may impact the taxability of the transaction. California’s regulation states that the sale of prewritten software is not taxable unless the seller transfers title to or possession of storage media or the installation of the program is a part of the sale of the computer. The transfer of storage media can make the entire transaction taxable even if separately stated and priced on the same invoice.
There are instances where something is clearly tangible, but it’s not defined as tangible personal property for sales tax purposes because intent or purpose behind the “thing” is not tangible. Currency used as a medium of exchange falls into this category – the currency itself is not taxed even if physical bills or coins are used to facilitate a transaction.
However, when the subject of the transaction is tangible money, such as the sale of a collector coin, the transaction can be subject to sales tax.
Some states consider the sale of coins, paper money, and bullion for purposes other than use as a medium of exchange to be taxable as tangible personal property. Common provisions that make sales of money taxable are if the coin/bill is not currently accepted as currency and if the sales price exceeds the face value of the coin/bill.
Wisconsin imposes sales tax on coins that are sold, licensed, leased, rented or traded as collector’s items, above their face value. In Tennessee, bullion and bullion made into gold or silver coins is subject to Tennessee sales and use tax, “with collectible gold or silver coins, you are actually buying the coin instead of exchanging forms of legal currency.”
Other states provide a sales and use tax exemption for the retail sale of rare coins, paper money, and precious metal bullion. Coins or currency that is in general circulation and that is or was of legal tender are often statutorily exempt.
For example, in Indiana, the sale of certain coins, bullion, or legal tender are exempt from sales tax. Transactions involving the sale of legal tender are always exempt from sales tax, even if sold at more than face value. Missouri exempts numismatic coins or other forms of money and legal tender manufactured of gold, silver, platinum, palladium or metals with a fair market value greater than the face value of the coins.
The products we incorporate into day to day life increasingly bring the physical and virtual world together. These products can be categorized as the “Internet of Things” (IoT). The IoT merges tangible goods with remotely accessed technology to create a network of “intelligent” devices that generate data to automate processes and enable new services.
Familiar examples are individual or home smart devices like the Fitbit or Amazon Echo that combine a tangible good with AI or data collecting abilities. However, IoT spans well beyond consumer technology. Industries from manufacturing to agriculture to energy to healthcare use intelligent devices to unlock efficiencies.
IoT products do not fall neatly within the boxes of tangible personal property or intangible property. So how are they classified for sales tax? States may classify them in innumerable ways from data process or storage services, communications services, digital goods, prewritten software, and beyond.
The critical starting place is what exactly is being sold. In many cases, a tangible delivery or nature makes a difference even if an intangible element is incorporated.
For example, if you bought a smart refrigerator that has a built-in display that allows you to order groceries, play music, and more – what did you buy? For sales tax purposes, it would be difficult to argue that you bought artificial intelligence and not a refrigerator which is tangible personal property.
You must consult rules on a state by state basis. A smart device such as the Amazon Echo is sold as tangible personal property. However, the true intent of the transaction could be access to the intangible information services provided. And in some cases, there may be separate charges for the tangible good from a service agreement for the digital service.
Understanding the nuances of sales tax classification rules like the implications of delivery method allows you to accurately apply sales tax to your products and services.
Whether you work with emerging technologies like virtual currency or in a more “traditional” industry, you need to know how to navigate the tangible/intangible divide and the increasingly complicated sales tax issues that derive from it.
Diane L. Yetter is a strategist, advisor, speaker, and author in the field of sales and use tax. She is president and founder of YETTER Tax and founder of the Sales Tax Institute. You can find Diane on LinkedIn and Twitter.