Executive Contacts
Businesses and individuals across the U.S. find stark differences in how states tax personal property and services, in particular digital services, which creates challenges to understanding and complying with the various sales tax laws.
Sales tax has been in existence since states began adopting this form of taxation in the 1930s.¹ Today, most states start with the premise that sales tax applies to the sale of tangible personal property. Although the definition of tangible personal property can vary slightly, the term generally means anything that can be seen, weighed, measured, felt, or touched or that is in any other manner perceptible to the senses.² This definition could include property as disparate as books, appliances, computers, boats, automobiles, building supplies, and more. Some states even include electricity in the definition. Tangible personal property does not include real property, such as buildings and land, or intangible property, such as stocks, bonds, and bank accounts.
Across the U.S., the application of sales tax differs greatly. Some states, such as California and Georgia, tax very few services. A small number of states, namely New Mexico, Hawaii, and others, tax almost all services. The majority of states that have adopted sales tax, however, fall somewhere in between. Historically, states have taxed forms of services ranging from telecommunications and utilities, hotel and lodging services, repair labor (generally for specified types of property), and perhaps limited others such as parking services, security services, and entrance into amusement venues.
Taxation on Digital Services
Because of the overwhelming rise in technology and digitally delivered services, sales-tax states have increasingly begun to tax information services, data processing services, digital goods (e.g., digitally delivered books, movies, and music), and other digital services. Although the types of services subject to sales tax will vary widely by state, one of the most complex categories relates to software as a service (SaaS).
In the relatively recent past, software was delivered via a diskette that could be sold in stores. Later, “load and leave,” electronic download, and other variations of software delivery began to muddy the sales-tax water. Currently, with the advent of cloud computing, the need for a personal computer to house software applications is no longer necessary at all! For example, most accounting and tax software is now “in the cloud” and can be accessed through the internet with any digital device.
The taxation of SaaS varies greatly from state to state. Tennessee, for example, taxes all forms of software (i.e., canned or custom) regardless of the method of delivery. On a multistate basis, the difficulty in understanding SaaS taxation lies in 1) understanding the true nature of the product being sold and 2) the state-by-state definitions of taxable products. For example, is the buyer of the software truly purchasing the use of the software, or is the purchase more related to one of the following services, and is that service taxable in the relevant state:
- An electronic storage service
- A data processing service
- An information service
- A monitoring service
Understanding the taxable nature of a digital product or service requires an in-depth knowledge of the product as well as a review of the applicable state’s laws, including a review of related definitions, regulations, and rulings. Sometimes a letter ruling or other discussion with state authorities may be warranted.
For assistance with sales and use tax planning and compliance or any other matter related to state and local tax services, our executive contacts are happy to assist. You may contact them at the email addresses below or by calling (800) 270-9629.
¹Tax Foundation “When Did Your State Adopt Its Sales Tax”
²Definition from T.C.A. 67-6-102(97)(A)
