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States Look to Lessons Learned In Fairy Tales to Maintain Sales Tax Base

05.22.17 | SALT Chat

Anyone remotely familiar with sales and use tax, regardless of the state and locality, knows the first and most basic lesson you learn is the tax applies to tangible personal property (“TPP”) and enumerated services.  Of course, a myriad of exceptions and exemptions apply to the taxation of TPP, but a service needs to be specifically mentioned by the taxing scheme (or the law as we sometimes like to refer to it) in order for the tax to attach itself.

We are now seventeen years into the twenty first century and even my Mom knows Egghead Software closed its last retail location in 1998 because no one buys those floppy discs anymore.  While I know most of you don’t miss the floppy (or even know what it is), the state sales tax base certainly does since “canned” (non-custom) computer software is taxable as TPP in virtually every jurisdiction I can think of.  Software as a service (SAAS) has largely replaced the actual physical ownership of code or floppy discs and the states no longer knew how to impose the tax.  Is the software still TPP or is the software vendor now simply providing a service—which as we all know, needs to be specifically enumerated in order for sales tax to apply.

The states are all over the map on this one.  Some states have enacted legislation specifically exempting digital types of goods; others have enacted legislation specifically taxing certain types of digital goods.  While others have kissed that frog turning it into a prince – or simply through administrative proclamations of various types, declared that SAAS is tangible personal property and, of course, is subject to tax.

New York has been kissing the frog for some time now in analogizing SAAS to the sale of TPP.  The most recent example proclaiming online video generation services taxable.  (See TSB-A-17(4)S March 1, 2017 https://www.tax.ny.gov/pdf/advisory_opinions/sales/a17_4s.pdf.)

Observers of sales tax trends know that the “definition” of TPP has been slowly expanding (not necessarily by statute) in many jurisdictions.  I have seen it multiple times, where a taxpayer has undergone a full blown audit where sales of their product or services were found not subject to sales tax, yet on a subsequent audit the same jurisdiction taking just the opposite position.  As if the constant emergence of new digital products and services weren’t daunting enough to keep up with, now one has to be aware of continuously shifting and evolving positions.  Well, I’m not complaining.  This is what makes my job interesting.

Contact me at WBerkowitz@BerdonLLP.com or your Berdon advisor.

Wayne Berkowitz, a tax partner and head of the State and Local Tax Group at Berdon LLP, advises on the unique requirements of governments and municipalities across the nation.