As more states adjust their tax policies to address the increasingly digital nature of commerce, compliance complexity and uncertainty are also escalating. The entire world is reeling from the challenge of figuring out how to efficiently tax the various sectors of the digital economy.
In the U.S., there is widespread misunderstanding about digital taxation. Sales and use taxes have applied to digital goods – including digital books, music and videos -- in the U.S. for years. The 24 member states of the Streamlined Sales Tax Governing Board have a standard definition for digital goods. Despite that laudable attempt at greater standardization, digital advertising tax legislation and rules vary, and they are sparking contentious legal battles. Although a part of the digital tax conundrum, digital advertising presents an additional hurdle that is related more to constitutional restraints and to interstate commerce. Plus, more states are taking hard looks at the taxability of cloud computing, non-fungible tokens (NFTs) and cryptocurrencies. As a whole, governments are progressively exploring how transactional digital [economic] activities will be taxed, in each of the corresponding sectors, and proposing to tax new digital business lines. Recently, new bills have been introduced in Connecticut, Indiana, Massachusetts, and New York requiring new taxes on various ecommerce giants.
This year, Vertex will continue to zero in on the following digital domains to keep tabs on how states and local jurisdictions are reshaping tax policies to generate more revenue from digital commerce:
- Cloud computing: Varying forms of cloud computing transactions are taxable in more than 15 states, including Texas, New York, Pennsylvania, and Ohio. Obviously, the use of cloud computing is vastly expanding. In some states, these services are not taxable; in others, they are. And a handful of other states have yet to issue formal guidance.
- Digital services taxes (DST) and digital products sales taxes: While Maryland’s lengthy attempt to enact (and then keep in force) a groundbreaking digital advertising tax currently appears headed for failure, other states have implemented various types of DSTs and digital products sales taxes, or are considering doing so (e.g., New Mexico). States with some form of digital advertising taxes include Connecticut, Massachusetts, New York and Texas. Arkansas, Connecticut and Indiana have digital taxes on social media transactions in place. The following five states – Massachusetts, New York, Oregon, Washington and West Virginia – tax data mining, personal information usage and or sales of personal data.
- NFTs: NFT refers to a non-fungible token. Yet, it also seems to be translating to a “new favorite tax” for state revenue departments. More states are issuing guidance on their approach to taxing these cryptographic assets that are minted on a blockchain and comprised of unique identification codes and metadata (and therefore cannot be copied, substituted or subdivided). Last July, the state of Washington issued an “Interim statement regarding the taxability of non-fungible tokens (NFTs)” while stating that it plans to work with stakeholders to develop more comprehensive guidance.
- Cryptocurrency: States that have provided guidance on cryptocurrency taxation generally treat crypto as intangible property, with no sales tax due on cryptocurrency exchanges. Sales tax is due when cryptocurrency is used to purchase taxable property and services. That said, state guidance varies as to how to compute the tax base (e.g., basing it on the advertised selling price, crypto’s value at the time of the transaction, or crypto’s value at the time of payment).
The era of digital taxation remains in its infancy. This makes it crucial for tax groups to monitor digital transaction trends and the ways in which tax jurisdictions throughout the U.S. and around the world are responding from a policy perspective.
Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in Tax Matters are those of the authors and do not necessarily reflect the official policy, position, or opinion of Vertex Inc.