Line items

States continue to clarify and expand the tax base

In May 2021, Arizona issued a Private Letter Ruling, continuing to broadly interpret the state’s definition of what constitutes tangible personal property subject to tax. In L.R. 21-003 Arizona confirmed a taxpayer’s subscription to digital data was subject to the Arizona transaction privilege tax (Arizona’s sales tax) as the rental of tangible personal property. Arizona is clear that SaaS is subject to sales tax; however, in this case the customer did not receive access to software itself.  Rather, the taxpayer in the ruling used its proprietary software to compile data and provided that data to customers on a subscription basis.

In June 2021, the Colorado governor signed legislation to impose sales tax on “digital goods”, which the state has defined as a category of taxable tangible personal property subject to sales tax. The state’s definition of digital goods, after much debate, was drafted so as not to include sales of SaaS. However, Colorado does expressly include streaming services in its definition of a digital good, a position that may be challenged in court in the months ahead. It is important to note that Colorado does have dozens of home rule jurisdictions that do tax software.

Maryland once again issued further clarification in July 2021 with respect to legislation enacted in March of 2021 expanding the sales tax base to include the taxation of digital products. Anrok discussed the initial legislation and earlier state issued clarifications in an earlier tax update. Maryland’s most recent revisions to Business Tax Tip #29 now excludes sales of professional services delivered electronically from the definition of a taxable digital product.  This was previously deemed taxable in the earlier guidance. SaaS, which all iterations of Maryland’s guidance include as a taxable digital product, remains taxable in Maryland. However, this latest guidance does expand on what characteristics could qualify a SaaS product as “custom” and therefore exempt from the Maryland sales tax. SaaS companies should review this latest guidance carefully to determine whether their software could be excluded from the Maryland digital product definition.

In May, North Carolina issued a Private Letter Ruling appearing to further stretch the limits of their definition of a digital good. While North Carolina does not currently tax SaaS, the state does have a broader definition of taxable digital goods than most states. In the Ruling No. SUPLR 2021-0019, the state determines that a seller of subscriptions that allow customers to access information hosted in the cloud via a web portal is the sale of “digital property” and subject to tax.

Anrok has explored state taxation of digital products in The evolution of SaaS taxability, and as the above developments support, taxation of digital goods continues to be a significant area of focus for states.

Nexus standards

Just over three years since South Dakota v. Wayfair, Inc. was decided, the last state holdout on the economic nexus front finally took action. On June 30, 2021, the Missouri governor signed legislation, passed by the state’s house and senate earlier in the year to establish economic nexus thresholds for remote sellers. SB 153 & 97 provide that effective January 1, 2023, remote sellers who sell more than $100,000 of taxable products or services to customers in Missouri must collect sales tax.

Forecasting

2021 kicked off renewed attention within the state tax arena looking at whether state tax laws are keeping pace with the digital world.

In July of 2021, the Uniformity Committee of the Multistate Tax Commission (“MTC”) began drafting an outline for a white paper addressing state taxation of digital products. The stated goal of the white paper is to identify potential best practices and areas for increased uniformity around state taxation of digital products. Whether the paper will specifically address SaaS is unclear; however, the intent appears to be broad in scope stating it intends to “encompass the entire category of products made possible by digital or electronic technologies.” The committee will present the full paper at the November 2021 meeting, at which point state representatives will be able to offer comments and feedback.

Perhaps taking a cue from the MTC, the 2022 New Jersey appropriations bill requires a study of the state’s tax laws as they relate to the “digital economy”, and submit findings and recommendations for law changes by March 2022. Of particular note is the requirement that the study identify “particular forms of economic activity that are untaxed or undertaxed that have grown more significant in the modern economy.” New Jersey currently does not impose sales tax on SaaS, and has certain sales tax exemptions for business use, both of which could change based on the findings of this study. The New Jersey 2022 legislative session will be closely watched depending on the findings in the study.

As states continue to look for ways to address budget shortfalls brought on by COVID-19, studies like those being conducted by the MTC could provide good support in 2022 legislative sessions for states looking at ways to expand the sales tax base.

‍