North Carolina Enacts Exemptions for Certain Digital Goods

Effective retroactively to October 1, 2019, North Carolina has enacted sales and use tax exemptions for:

• Sales of a digital audio work or a digital audiovisual work that is a qualifying education expense to the operator of a home school
• Sales of a digital audio work or digital audiovisual work that consists of nontaxable service content when the electronic transfer of the digital audio work or digital audiovisual work occurs contemporaneously with the provision of the nontaxable service in real time.

Additionally, effective June 5, 2020, the legislation enacts a grace period from sales and use tax enforcement actions with respect to the sale of certain digital property by certain continuing education and professional development providers. The Department of Revenue (DOR) shall take no action to assess a person for any sales and use tax due for a filing period beginning on or after October 1, 2019, and ending prior to August 1, 2020, with respect to the retail sale of digital audio works or digital audiovisual works that meet either of these conditions:

• The digital audio works or digital audiovisual works consist of continuing education instruction approved by an occupational licensing board
• The digital audio works or digital audiovisual works consist of professional development instruction for school board members, administrators, or staff.

The grace period does not apply to a person that received specific written advice from the Secretary for the transactions at issue for the laws in effect for the applicable period or to a person that collected tax and failed to remit it to the DOR.

The legislation also amends the definition of “certain digital property” to be “Specified digital products and additional digital goods. The term does not include an information service or an educational service.”  An educational service is the delivery of instruction or training, whether provided in real time, on demand, or at another set time, by or on behalf of a qualifying educational entity where at lease one of the following conditions applies:

• The instruction or training is part of the curriculum for an enrolled student
• The instruction or training is encompassed within the institutions’ accreditation or prepares an enrolled student for gainful employment in a recognized occupation
• The participant is evaluated by an instructor.  “Evaluated by an instructor’ does not include being graded by, scored by, or evaluated by a computer program or an interactive, automated method.
• The participant is connected to the presenter or instructor via the Internet or other networks, allowing the participant to provide, receive, or discuss information through live interaction, contemporaneous with the presentation.

See our previous news item North Carolina Expands Applicability of Sales Tax to Digital Property. (Ch. 6 (H.B. 1079), Laws 2020)