Taxation of Digital Goods & Services · • Provides a framework for the taxation of digital goods and services. • Restricts taxation of a digital good or service to taxation by

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Broadband Tax InstituteTaxation of Digital Goods

October 17, 2017Brandi Drake (Moderator)Charter Brad Ashby T-Mobile Deborah BierbaumAT&TCharlie KearnsEversheds Sutherland

Eversheds Sutherland PRIVILEGED AND CONFIDENTIAL

Brad AshbyManager, Transaction Tax Policy, T-Mobile

─ Prior Professional Experience• KPMG, Seattle and Washington National Tax

─ Professional Affiliations• Washington State Bar Association• Washington State Board of Accountancy

─ Education• J.D., Arizona State University College of Law• B.A., Brigham Young University

─ Publications• Navigating Multiple Points of Use—A Practical Guide for Software

Purchases• The Role of Online Marketplaces in the Collection of Transaction

Taxes• More Light Shines on State Taxation of SaaS in 2015• Crowdfunding Contributions and State Sales and Use Taxes

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Deborah BierbaumAssistant Vice President Tax, AT&T

─ Responsible for global tax legislative policy issues at AT&T

─ Acting Chair of the New Jersey Sales and Use Tax Review Commission

─ Board Member• Council On State Taxation• Business Advisory Council to the Streamlined Sales Tax

Governing Board

─ Prior Professional Experience• Deputy Commissioner for Tax Policy at the New York State

Department of Taxation and Finance

─ Education• Masters of Science in Taxation, Pace University• Bachelor of Science in Business Administration and Accounting,

Clarion University

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Charlie KearnsCounsel, Eversheds Sutherland

─ Extensive experience with state and local tax issues affecting the communications and electronic commerce industries

─ Experienced with federal legislation related to state taxes, state legislative matters, and the Streamlined Sales and Use Tax Agreement

─ Prior Professional Experience• Graduate Fellow at the Council On State Taxation (COST) in

Washington DC

─ Education• LL.M. in Taxation, Georgetown University Law Center• J.D. and B.C.L., Louisiana State University School of Law• B.A. in English, University of North Carolina

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Brandi DrakeSenior Director, Strategic Tax, Charter

─ Manages transaction tax audits and assists with tax legislative policy issues at Charter

─ Board Member• Business Advisory Council to the Streamlined Sales Tax

Governing Board

─ Prior Professional Experience• KPMG, Atlanta and Washington National Tax

─ Certification• Certified Public Accountant, Georgia

─ Education• Masters of Accounting in Taxation, University of Georgia• Bachelor of Business Administration, University of Georgia

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− The Current Landscape

− Current Developments

− Policy Discussion

Agenda – Taxation of Digital Goods

Eversheds Sutherland

Digital GoodsThe Current Landscape

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Overview of Business Models

─ Sellers of retail consumer digital products, including music, movies, books and software-related products like video games

─ Digital retailers sell products under various channels, terms and conditions• Delivery methods: streaming or cloud-based, downloads or

combination thereof• Rights of use transferred: permanent rights of use (purchases) or

less than permanent (rentals)• Payment streams: À la carte (transactional) or subscription to a

library of content

─ Direct-to-consumer issues

─ Facilities-based vs. over-the-top issues

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Transaction Tax Considerations

─ Nexus• Similar to e-commerce retailers, but unique considerations for

rentals in states that characterize digital products as TPP

─ Marketplace Collection• Legislation – Minnesota, Washington• Controversy – South Carolina• Other theories

─ Characterization of Transaction• “Product transferred electronically,” “specified digital product” or

“digital service”?• TPP?• Utility service?• Telecommunications service?• Pay television service? Linear vs. non-linear?• Taxable service (e.g., CT computer and data processing)?

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Transaction Tax Considerations

─ Tax Consequences of Characterization (or Mischaracterization) • Bundled transactions• Sourcing

Sometimes depends on the seller (MTSA) Documentation

• Exemption Certificate Issues• Resales or component part exemptions• MPU certificates

• Trials or “free samples” and use tax accrual

─ …and Non-Tax Consequences• Communications service provider• False Claims Acts/Qui Tam• Class actions

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Taxation of Digital Goods Overview

─ States continue to enact legislation expanding their sales taxes to digital goods and services and cloud-based goods and services.• There continues to be significant differences from state to state on how such

goods and services are taxed.• Some states have alternative tax regimes where application of their taxes to

such goods and services is unclear.

─ States also continue to evaluate their current authority to tax e-commerce services (e.g., cloud computing services, etc.).• States attempt to tax such goods and services by applying existing tax laws

related to the taxation of software or other tangible goods. Any attempt to include digital commerce in the tax base should be done legislatively to clearly identify the goods and services the state is seeking to tax.

─ A few states have specifically exempted digital goods/services or cloud computing services from taxation.

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Digital GoodsCurrent Developments

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Developments – States Ripe for Reform?

─ Alabama• Multi-year dispute with the DOR• Seems to have calmed down with the new

Governor/Commissioner• DOR no longer willing to pursue on audit the rental tax on

streaming video or VOD?• Legislative issue?

─ Louisiana• Ongoing budget issues, previous attempts by LDR (and parishes)

to tax digital goods, and study committee recommendations create likelihood of base expansion in 2019 revenue session.

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Developments – States Ripe for Reform?

─ Kentucky• In 2016, the Franklin County Circuit Court affirmed the Kentucky

Board of Tax Appeals decision in Finance and Administration Cabinet, Kentucky Department of Revenue v. Netflix, Inc. and held that Netflix’s streaming service was not a “multichannelvideo programming service” subject to the Gross Revenues Tax, Excise Tax and School Tax.

• Parties settled in early 2017, and DOR removed assessments against other OTT providers. However, it is still unclear if all OTT services will be treated equally.

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Developments – Administrative Rulings

─ Florida• Rental of digital video is a “video service” and subject to CST, but the

purchase of digital video is sale of an “information service” not subject to CST.

• Fla. TAA Nos. 14A19-005 (Dec. 18, 2014) and 10A-031 (June 28, 2010)

─ Iowa • Streaming service is taxable “pay television.” In the Matter of

Amazon Services LLP, Iowa Dept. of Revenue, 2017-240-2-0000, 12/28/2016.

─ South Carolina• Charges paid by customers to stream content such as television

programs, movies, music and other similar media directly to their devices to watch or listen to these types of media on their own schedule instead of having to watch at a specific time are subject to the state’s sales and use tax as taxable communications services. South Carolina Revenue Ruling No. 16-5, 07/06/2016.

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Developments – Administrative Rulings

─ Pennsylvania • Effective August 1, 2016, the following digital and/or electronic

content (including updates and support) is taxable TPP: (1) video, (2) photographs, (3) books and any otherwise printed matter, (4) applications (commonly known as apps), (5) games, (6) music or any other audio (including satellite radio service), and (7) any other taxable tangible personal property that is delivered electronically or digitally, streamed or accessed. 72 PSA § 7201(m)(2).

• Interpreting the 2016 legislation, the DOR ruled that a vendor’s sales of subscription-based, information retrieval products were taxable digital products – “electronic access to TPP.” Pennsylvania SUT 17-002, May 17, 2017.

• Tax applies regardless of whether the content is delivered electronically or digitally, streamed or accessed, and whether purchased singly, by subscription or in any other manner. Id.

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Developments – Legislative and Policy

─ 2017 Legislative Activity• Arkansas (base expansion)• Maine (base expansion)• West Virginia (base expansion)• Arizona (local)• Florida (local)

─ Study Groups• Arizona Committee to Discuss Digital Goods• Colorado Digital Goods Work Group

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Local Concerns

─ Chicago – Labell case

─ California UUTs

─ Louisiana parishes

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Digital GoodsPolicy Discussion

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NCSL Executive Task Force on State and LocalTaxation Principles and Resolutions

─ Cloud-Based Services (August 2012)• To ensure that taxation is equitable, states should: Establish consistent

sourcing regimes that recognize the special challenges to avoid multiple taxation; and not impose discriminatory taxes on cloud-based services.

• States should base their decisions on the nature of the service and not on the nature of the provider.

• Avoid imposing tax through administrative action.

─ NCSL Supports Passage of the Federal Digital Goods and Services Tax Fairness Act (August 2016)• The National Conference of State Legislatures urges Congress to pass the

Digital Goods and Services Tax Fairness Act, in conjunction with or after consideration of the Remote Transaction Parity Act, to establish a national framework providing certainty and uniformity for state and local governments in the taxation of digital goods and services, while protecting consumers from multiple and discriminatory taxation and supporting the continued growth of the digital economy.

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NCSL Policy Directives and Resolutions

─ Standing Committee on Communications, Financial Services and Interstate Commerce• Government should not choose winners and losers of the digital

age.• Government tax systems should regulate and tax

communications and digital commerce in a competitively neutral and non-discriminatory manner.

• Video policies should assure that like services are treated alike, investment is encouraged and services are taxed in a non-discriminatory manner.

• Franchise fees should be tied to actual costs to use the rights of way and be collected by one central agency per state.

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NCSL Resolution – Next Steps

─ Issue:• The Resolution supporting the Digital Goods and Services Tax

Fairness Act was up for renewal at the August meeting.• The Act is not yet introduced in the 115th Congress.

─ Solution:• NCSL adopted a resolution that would allow support of legislation

when it is introduced in this Congress if it: • Embodies the NCSL principles as outlined in the last resolution;• Follows the principles for taxation of cloud-based services; and• Does not pick winners and losers based on who provides the same service.

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Federal Legislation 114th Congress

─ H.R. 1643/S.851 (114th Congress) The Digital Goods and Services Tax Fairness Act:• Provides a framework for the taxation of digital goods and services.

• Restricts taxation of a digital good or service to taxation by a state or local jurisdiction whose territorial limits encompass a customer tax address, as defined by this Act.

• Provides a “bundling rule” for the taxation of digital goods and services transactions that are aggregated and not separately stated from other goods and services.

• Prohibits multiple and discriminatory taxation of digital goods and services.

• Excludes from the definition of “digital service” a service that is predominantly attributable to the direct, contemporaneous expenditure of live human effort, skill or expertise, a telecommunications service, an ancillary service, an Internet access service, an audio or video programming service, or a hotel intermediary service.

• Includes pay-per-view video services and video on-demand in the definition of a digital service.

• Supports the continued growth of the digital economy.

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Federal Legislation 115th Congress

─ The Digital Goods and Services Tax Fairness Act is not yet introduced in the 115th Congress.• The Sponsors are working with the communications industry to

address concerns the industry has with the prior version.

─ Communications Industry Concerns• Because of changes in technology, the growth of over-the-top

video services, and the current efforts of some state and local governments to tax digital goods and services because of the nature of the provider, the communications industry believes that the bill needs to be updated. Specific areas include:

• Updating and clarifying definitions of digital goods and services to account for the growth of over-the-top video services.

• Ensuring that all over-the-top video services are treated in a competitively neutral manner regardless of the provider.

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Taxation of Digital Goods & Services · • Provides a framework for the taxation of digital goods and services. • Restricts taxation of a digital good or service to taxation by