In recent months, multiple jurisdictions have issued guidance regarding the taxability of digital streaming services. These developments signify a growing trend by states to address whether and how such products and services should be taxed. Similar to other trending areas, such as Software as a Service (SaaS), states and cities must initially determine how to classify digital streaming based on existing state and local tax rules. As the following recent developments illustrate, companies offering digital streaming services, as well as consumers of such services, should be aware of the potential for divergent tax determinations across the different states. Find out more
The Texas Comptroller of Public Accounts has recently determined that electronically downloaded software licensed by a Utah corporation to Texas customers constituted physical presence in Texas sufficient to establish sales and use tax nexus. According to the decision, nexus was established because the software was characterized as tangible personal property and the Utah corporation retained all property rights in the software, which was physically present and generating revenue in Texas. The Comptroller upheld an Administrative Law Judge (ALJ) determination that the corporation had an obligation to charge and collect use tax from customers, and denied refund claims of sales tax paid and an interest waiver. [201409970H; SOAH Docket No. 304-13-5657.26; CPA Hearing No. 106,632, Texas Comptroller of Public Accounts (9/19/2014)]
On September 18, 2014, President Obama signed House Joint Resolution 124, which includes provisions extending the Internet Tax Freedom Act (ITFA) through December 11. The Act was previously scheduled to expire November 1, 2014, and the extension gives Congress a chance to consider the ITFA’s long-term future during the lame-duck session after the midterm elections.
The Michigan Court of Claims recently held in a summary disposition that remotely accessed software is not subject to Michigan sales and use tax. The court held that software accessed remotely was neither tangible personal property nor ‘used’ by the taxpayer as defined under Michigan statutes. Further, any prewritten computer software provided to the customer was only an incidental component of the various services purchased and did not subject the charges to tax. [Auto-Owners Insurance Company v. Department of Treasury, State of Michigan Court of Claims, No. 12-000082-MT (March 20, 2014)]
With the availability of high speed Internet access, smart phones, and tablets, it is not surprising that the global retail industry is experiencing a fundamental shift in how individual consumers research, select, and eventually purchase products. Individuals are shopping through a variety of different channels, some physical, some virtual, making for an easier and more streamlined shopping experience. E-commerce has quickly become a key channel for retailers to reach their customers. This embrace of digital technology and social media is creating a new landscape for retailers as they ensure that their policies and practices support these changes. These shifting business models are creating unique consumption tax issues for global retailers selling within and into the United States.
On October 18, 2013, in a 6-1 decision, the Illinois Supreme Court ruled that the state’s click-through nexus law is pre-empted by the federal Internet Tax Freedom Act’s ban against ‘discriminatory taxes on electronic commerce.’ The court did not reach the issue regarding whether the click-through nexus provision violated the US Commerce Clause. [Performance Marketing Association, Inc. v. Hamer, Ill. Sup. Ct., #114496 (10/18/13)]
On May 23, 2013, Minnesota Governor Mark Dayton signed H.F 677, which makes significant changes to Minnesota’s sales and use tax, including taxing digital goods, adding click-through nexus provisions, authorizing multiple points of use exemption certificates, and requiring remote sellers to collect and pay sales and use tax consistent with federal legislation.
Effective June 26, 2013, Maine sales tax applies to products transferred electronically. A “product transferred electronically” is sold in Maine if:
– the product is delivered electronically to a purchaser located in Maine;
– the product is received by the purchaser at the seller’s location in Maine;
– a Maine billing address is provided by the purchaser in connection with the transaction; or
– a Maine billing address is indicated in the seller’s business records.
A “product transferred electronically” is a digital product transferred to a purchaser electronically, the sale of which in non-digital physical form would be subject to tax as a sale of tangible personal property.
This legislation, H.P. 1079, was passed despite the Governor’s veto.
On July 5, 2013, Missouri enacted S.B. 23 which provides affiliate and click-through nexus standards for sales and use tax purposes.
Out-of-state vendors selling taxable products or services to Missouri customers should review whether activities of in-state affiliates or third parties create a sales and use tax registration and filing obligation with the state. This is relevant also for ecommerce vendors.