Sales and use taxes in a digital economy.

• Author: Jensen, Jennifer

Today's technologies are constantly changing at an ever-increasing speed. What was new a year ago is old today. Newer gadgets and capabilities are entering the market every day. People and companies are demanding more and more in the way of innovation. Movies, once only viewable on television or in a movie theater, are now readily available for streaming from online providers anywhere consumers have access to the internet and a mobile device. Items historically purchased or rented at a fixed store location are now just the click of a mouse away. Payments can be made without using traditional currency (and this does not just refer to credit card or electronic payments). Businesses rely on cloud providers to provide IT support and perform back-office functions in lieu of purchasing and maintaining their own infrastructures.

While consumers and businesses reap the benefits of faster, better, more efficient technology, state tax departments continue to struggle to provide timely guidance on the potential sales and use tax implications of modern technological offerings. As a result, providers of digital offerings may see different tax treatments and classifications from state to state depending on a variety of factors. This column highlights the complexities of taxing digital products through the example of streaming content, discusses the increasing use of digital currencies and how states have begun to react, addresses the challenges of determining what is a true service and what is a license of technology, and looks to the horizon and upcoming trends.

Varying Tax Treatments

The U.S. consumer is no stranger to being entertained by the movie and television industries; the streaming of movies and television content is the perfect example of industries being transformed by technology. Gone are the days of DVDs and VHS tapes. Rather, modern viewers stream popular movies and favorite shows from online providers, and the trend is expected not only to continue but also to grow. One recent study suggests that global electronic home video revenue will exceed physical home video revenue by 2018. (1) The sales and use tax treatment is simple when a movie on a tangible DVD or VHS cassette is purchased. However, tax determinations are much more challenging in today's digital society and can change from state to state depending on the state's definitions of various products and services.

Digital goods provide a good example. "Digital goods" are generally defined as goods that are stored, delivered, and used in electronic format. (2) Arizona's sales and use tax laws do not define a "digital good" or "digital service" but do define "tangible personal property" rather expansively. That definition includes personal property that may be "seen, weighed, measured, felt or touched or is in any other manner perceptible to the senses." (3) The state has not provided any additional clarifying guidance but has taken the position that Arizona's broad definition of tangible personal property allows the state to impose tax on items delivered electronically. (4) As such, Arizona treats the sale of a streaming video service as a taxable sale of tangible personal property.

Similar to Arizona, Texas sales and use tax laws do not define "digital good" or "digital service," and they also broadly define "tangible personal property" to...