Businesses that produce, sell, and/or consume Digital Products should stay up-to-date on changes in taxation of these items. Radio stations, movie rental stores, and CD retailers are not the only ones losing profits (or their businesses entirely) to the increase in individuals and businesses obtaining videos, music, and/or software online. As sales of CDs, DVDs, and packaged software continues to decrease, so does the sales tax collected due to these sales. State and local governments are feeling the crunch. In response, some local and state governments are trying to keep up with the changing technology and fill their coffers, by taxing online sales of digital media.
Many States. In their article, “States Try to Tax Streaming Videos, Cloud” in the Wall Street Journal, August 21, 2015, authors Mark Peters and Greg Bensinger discuss the ways local and state governments are attempting to tax new technologies to make up for the shortfall left by the lack of CD, packaged software and video games, and DVD sales. While at one time the sale of these goods was taxed through traditional retail tax laws, now that the tangible good, packaging, and brick and mortar store has disappeared, so have some states’ abilities to obtain a sales tax on these items.
Retail tax laws were historically based on the sale of tangible goods. As many tangible goods were digitized, they fell into a gray area of taxation. Consumers were still buying a movie (or software, music, etc.), but they were no longer receiving anything tangible. There were (and continue to be) questions about whether these items could be taxed under the traditional tax laws. As such, portions of some state and local tax codes were rewritten in order to collect taxes on these sales.
Washington State Actions. In Washington State, many Digital Products are subject to sales or use tax. Digital products subject to tax include downloadable movies, music, etc., and other streamed and accessed digital goods. Washington State taxes these products whether the consumer permanently keeps rights to use the item or whether it is only available for use for a short period of time (for example, a movie that you are provided access to for 24 hours). Buyers of Digital Products are not the only ones paying taxes. Sellers of Digital Products are also required to pay Washington B&O tax for the portion of their sales that occur in Washington State.
What is Taxed? In Washington, a Digital Product is either digital good or a digital automated service that is transferred electronically. A digital good is data, facts, information, music or other sounds, movies or other images, and any combination of the preceding. Digital automated services are services that use software applications and are transferred electronically. There are a number of digital items that are specifically excluded from the definitions of “digital good” (exclusions include: internet access and computer software), or “digital automated service” (exclusions include: internet access, payment process, and data processing services).
Exemptions. In addition to the exclusion from the definitions of taxable Digital Products, there are exemptions for businesses that provide Digital Products to consumers in Washington. One of the exemptions is for businesses that provide digital goods and/or digital automated systems free to the general public. There is also an exemption if the purchase of a digital good is for business purposes only. Both the business purposes exemption and the free to the public exemptions must be documented by an exemption certificate. There are many other exemptions available.
Point of Sale. Where a sale takes place is also a difficult question in relation to Digital Products and taxation. At one time it was very easy to determine where a sale had happened. If you went to a local Blockbuster Video and purchased a DVD, the sale of the DVD clearly took place there, and any taxes levied on that sale would be taxes from the location of the Blockbuster. With sales of Digital Products the answer is more complicated. A company may be headquartered and produce their content in one state, but could sell the Digital Product in Washington without having ever stepped foot in the State. In Washington, Digital Products are taxed where they are purchased for use. So, a Washington consumer will pay applicable Washington taxes on their purchase of Digital Products.
IP Asset Purchase. Digital media in the form of intellectual property (i.e., copyrighted materials & code, trade secrets, and patents rights) are typically not taxed in the purchase of assets by a purchaser in Washington State.
As technology continues to evolve, state tax codes are likely to evolve as well. It is important that businesses understand the best way to prepare themselves as the laws around technology continue to respond and change too. If you would like to learn more about how the evolving law will impact your technology company, please contact us today.