The following is a guest post by Diane Yetter, one of the nation's leading authorities on Sales & Use Taxation and founder of the Sales Tax Institute (see end box for more about Diane). In this post, a follow-up to Diane's recent COST presentation, “Taxing Software, Digital Goods, and the Cloud”, Diane discusses the inconsistencies in how states are treating these products and services and the challenges this presents.
We used to go to the bookstore to find a bestseller, the record store to buy a CD (or album if you are old enough to remember those!) and the computer store to buy the latest video game. In those days, it was easy to determine the applicable sales tax for such purchases. They were tangible goods and generally taxable at the location where we purchased them.
Now those items are more frequently purchased as digital goods – we either download them to our electronic device of choice or they are hosted and we just access them and use them as we need them. So, what are they? Tangible goods? Software? Digital audio-visual works? And even if you think you know what they are – does the state department of revenue? The answer is probably no – and even scarier is that different states could consider the exact same item to be defined differently even if they get to the same taxability answer.
I recently participated in a presentation at the COST Sales Tax Conference called “Taxing Software, Digital Goods, and the Cloud.” After my co-presenters did a great job trying to educate the audience on what the technology is all about, my job was to relate the technology to the tax policy across the states. I started off by asking the audience: “Do you think you could explain this to an auditor? Do you even know what your company’s infrastructure is so that you could tell an auditor?” The audience resoundingly said NO!
Keep in mind, that as sales tax professionals, we’ve always prided ourselves on understanding our business, our products, our business processes in order to explain it to the auditors whose job it is to ensure we are in compliance. So, if it is difficult for those of us whose job it is to understand what our company is buying and selling to help determine taxability, how do we think the states can really understand these new technology platforms and products and make tax policy in a timely manner so that our companies can be in compliance? That is our challenge and theirs. We must work together since by the time the audit even happens in 3 to 5 years the technology won’t even be around to show them.
To try to show how confusing this is, I had pulled a number of letter rulings and cases to demonstrate the complexity and inconsistency among the states. I found three situations in which the exact same facts were sent to multiple states for ruling requests. The first was for an ASP Product – nothing was downloaded by the customer, no title passed to the customer – and it was considered SaaS. Kansas ruled that SaaS is a service and not subject to sales tax. Iowa ruled that it was software delivered electronically and also not taxable, but because they don’t tax electronically delivered software. A similar set of facts for a SaaS contract in Tennessee was not taxable in Tennessee because the server on which the hosted software resided was located outside of Tennessee. But Tennessee considered the granting of the license to use as software, but because there was no software downloaded this was deemed to have occurred at the location of the server, which was outside of Tennessee. So, three states, the same taxability answer – Non-taxable – but for three different reasons. And these states considered them different things – Kansas considered it a service, Iowa considered it electronically delivered software and Tennessee considered it a license to use software.
This is just one example of the inconsistency – and the challenges we have ahead of us. Even with the definitions included in the SST Agreement, there are so many new technology offerings that the states don’t know what to do about this. Oh, and don’t forget that the three states in the example above are all SST States!
Diane Yetter is President and Founder of YETTER, a sales tax consulting firm, and a strategist, advisor, and renowned speaker in the field of sales and use tax. Diane is also Executive Director of Sales Tax Institute offering sales and use tax classes and training.