Line items

1. Five years post-Wayfair, sales tax on software is still shifting

The brief: Last month saw the five-year anniversary of 2018 Supreme Court case Wayfair v. South Dakota, which opened the doors for states to impose sales tax obligations on out-of-state sellers. In 2023, all 50 states have implemented sales tax laws for remote sellers, and legislation continues to shift in ways that especially impact businesses selling software and other digital products.

The backstory: Prior to the Wayfair case, states could only impose sales tax obligations on businesses with physical presence, such as physical locations, employees, or inventory located in the state. Companies with customers in a state but no physical presence were not required to charge sales tax on those sales.

The ruling in Wayfair v. South Dakota, however, allowed for states to impose a sales tax obligation on businesses with a significant economic presence, regardless of their physical presence in the state.

Once the Supreme Court upheld South Dakota’s thresholds for economic presence—200 transactions or $100,000 in sales in the state—as a reasonable standard, many other states quickly followed suit. And as of January 1, 2023, every state has economic presence requirements in place. Some states have since revised their sales tax laws to lower the threshold for out-of-state sellers, with Louisiana eliminating its 200-transaction threshold as of August 1st.

The bottom line: Wayfair radically expanded the number of jurisdictions that businesses need to factor into sales tax compliance planning—and five years later, laws continue to shift. It’s also worth noting that physical presence is still a core sales tax trigger, and fast-growing software businesses with wide customer bases and distributed teams must be especially diligent to avoid the costs of non-compliance.

2. Colorado streamlines administrative requirements for local sales tax

The brief: Colorado passed a law, going into effect July 1, 2023, that prohibits local governments from requiring remote businesses to register locally for sales tax purposes. The move consolidates some of the administrative burden for businesses operating in Colorado, which has repeatedly come under fire from taxpayers and commentators.

The backstory: Colorado has one of the most complex sales tax regimes in the country, with local cities and counties able to set their own—sometimes conflicting—rates and taxabilities. This means that some products that aren’t broadly taxable at the state level, like SaaS, can still be taxed by dozens of local jurisdictions.

The resulting compliance burden on businesses with customers in Colorado is high. Companies must be aware of their products’ taxability in over 70 different municipalities, on top of the Colorado state guidelines. And once sales tax obligations are triggered, those companies could be on the hook for complying with the administrative requirements of dozens of local jurisdictions every month.

The new law eases at least one part of that burden, letting businesses register for state-level licenses that apply locally as well. Local jurisdictions will be prohibited from requiring remote businesses to get a separate license to collect sales tax.

The bottom line: While businesses must still comply with both local and state regulations, this move is good news for software companies. States with high administrative burden for taxpayers, like Colorado and Louisiana, face increasing pressure to continue streamlining those processes.

3. EU issues preliminary guidance on NFT taxability

The brief: On March 21st, the EU’s VAT Committee published a working paper with some initial reflections on the taxability of non-fungible tokens (NFTs). Though the committee didn’t take a definitive position, the paper suggests that the EU could classify NFT products as “electronically supplied services,” which are taxable in the EU. The paper also comments on other scenarios where NFTs would not follow ESS taxability.

The backstory: NFTs are the latest in a slew of digital products to test the boundaries of tax legislation, spurring governments to update their tax codes to capture revenue on sales of those products. Some legislatures have moved more quickly than others, with Washington, Pennsylvania, and Puerto Rico among the few that explicitly tax NFTs in 2023.

Once a new sales tax or VAT precedent is set, other states and governments often quickly enact similar legislation. Any ruling by the EU would have significant implications for VAT laws around the world, with many countries looking to the EU’s tax laws as an example.

The bottom line: The EU committee’s attention to NFTs is further indication that governments will continue pursuing tax revenue on digital products. Software businesses should keep a close eye on changes in taxability definitions around the world.

4. Israel delays VAT on foreign digital services, while other countries move forward

The brief: In April, Israel’s long-awaited VAT requirements for foreign sellers were dropped for the 2023/2024 fiscal year. Also in April, Kenya and Benin implemented its VAT requirements for foreign sellers, and Senegal confirmed its requirements in May.

The backstory: Since the EU extended its VAT regulations to foreign sellers in 2015, many other countries have followed suit. Kenya, Benin, and Senegal are the three newest countries to join that list.

Israel’s VAT regulations for foreign digital services have made appearances in budget plans since 2016, and a new proposal for the 2023/2024 budget was introduced earlier this year. But in April, the government dropped plans to implement the requirements this fiscal year. Despite delays, the country is expected to pass some version of the proposal in the near future.

The bottom line: For US-based software companies with customers abroad, dealing with VAT is increasingly unavoidable. In many countries, VAT compliance is required from the first sale made in the country. Businesses should put a process in place to comply with VAT regulations, in order to avoid paying penalties, fees, and back taxes out of pocket.

Forecasting

• In May, Maryland’s Supreme Court reversed a lower court decision that had delayed the rollout of the country’s first-ever digital advertising tax, allowing the tax to go into effect retroactively for the 2022 tax year. The tax, which applies to the digital advertising revenue from companies making over $100 million globally, continues to face controversy. But other states, notably New York, are watching with interest as the legal dust settles, with hopes of passing similar legislation.
• Governments continue to seek new ways to capture revenue from the fast-growing tech sector, with many countries considering a version of a digital sales tax or other novel tax schemes. In June, Denmark announced a forthcoming 5% cultural tax on streaming service providers, due to be implemented later this year.
• The EU’s first reporting deadline for DAC7 is looming. DAC7 requires “platform operators” to disclose key information on sellers using their platforms, from personal information of business owners to transaction details, and lays the groundwork for the possibility of increased audit activity in the EU. With 2023 data due on January 1, 2024, big players like Amazon, eBay, and Etsy are on the hook and should start making moves to comply.