Tax updates
Last Updated
4/14/2022

Quarterly sales tax update: Q1 2022

Anrok reviews recent state sales tax legislation, decisions, and cases impacting companies in the digital economy.

Anrok | Streamlined sales tax for SaaS

The bottom line

This quarter's updates include new tax legislation in several US states, early indications regarding the taxation of NFTs, and more:

  • Pennsylvania wrapped up its amnesty program
  • Kentucky, Georgia, Missouri all passed new tax legislation to expand sales and use tax for more goods and services
  • Virginia assessed sales and use tax on a software product despite it being delivered by electronic means
  • Washington and Puerto Rico are looking to become the first states to tax NFTs

Read on for more details.

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Table of contents

Line items

Amnesty is out

Pennsylvania wrapped up their amnesty program on January 31st which waived penalties and the possibility of criminal proceedings as well as reduced interest by 75%. Currently, Tennessee is the only amnesty program still open to those who register through the Streamlined Sales and Use Tax Registration System for unpaid or uncollected sales and use tax for the periods prior to registration.  

New tax legislation

In March 2022, Kentucky House Bill 8 passed the House and the Senate which expanded sales and use tax to 39 new services. The Bill specifically calls out web hosting services and prewritten computer software regardless of whether the software was maintained by the seller or a third party and whether the billing agreement is per use, per license, subscription, or other basis.

H.B. 8 would exclude tax on these new taxable services if the service contract was executed on or before February 25, 2022 or the lease or rental agreement was entered into on or before February 25, 2022.

Georgia House Bill 594, which would impose sales and use tax on certain digital goods including electronically delivered goods and software, failed to pass the House which would generally mean that the bill is dead for the year. There are still opportunities for this bill to be added to other bills that have passed over to the Senate.

Missouri is looking to expand the taxability of products to include digital products and subscriptions. It is slightly more difficult to expand sales tax in Missouri due to Constitutional Amendment 4 which states that the Missouri government cannot tax any service or transaction that wasn’t already subject to sales and use tax on January 1, 2015. However, the senate has called to amend this with Joint Resolution 33. SJR 33 specifically calls out “subscriptions, licenses for digital products, and online purchases of tangible personal property”. In the fiscal notes for SJR 33, taxpayers are reminded that the products listed above are already taxable under the use tax law in Chapter 144. This provision would clarify that these products would be subject to sales tax as well. The bill will likely be voted on by the public in the fall of 2022.

In an aggressive ruling by the Virginia Tax Commissioner,  a company was assessed sales and use tax on a software product that they claim was delivered by electronic means. Virginia Code §  58.1-609.5 1 states that software delivered electronically via the internet is exempt from sales and use tax, however the Department determined that the customer had not met the minimum documentation requirements for confirming electronic delivery of the software. Public Document 05-44 (4/4/2005) provides that “at a minimum a sales invoice, contract or other sales agreement must expressly certify the electronic delivery of the software and that no tangible medium for that software has been furnished to the customer.”

The new digital world

Exponential growth in NFT sales have left many perplexed, with sales volume sailing to $25.5 billion in 2021 and a predicted global market of $80 billion by 2025. States have mostly taken a hands-off approach when it comes to taxing nonfungible tokens, or NFTs, but that could all change soon as Washington and Puerto Rico are looking to become the first states to tax the digital good.

Washington has long been considered a leader on tax policy relating to digital goods, and many other states will be watching them closely. Washington is planning to issue an “excise tax advisory” which will address the taxability of NFTs. Despite NFTs not being specifically mentioned in the state’s current tax code, they do have a broad definition of digital products. The department has recommended that taxpayers treat NFTs as taxable under Washington’s existing sales and use tax code.

Puerto Rico is taking a different approach and expanding the definition of “specific digital products” to include NFTs. Puerto Rico’s Treasury department issued a regulation in January that would amend Article 4010.01 to include specific language around NFTs. The regulation is currently on hold to include other technical amendments, although it is anticipated to be released in May.

Forecasting

There are currently at least 31 states that apply sales and use tax to some type of digital product or services, however many states do not have good definitions of what are or are not included in these digital goods. On March 9th, 2022 President Biden signed an executive order  regarding digital assets and their underlying technology. Although this order does not specifically call out sales tax, many states will likely adopt the definitions the IRS develops as a result of this order.

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