Sales Tax - From Widgets to Services and Beyond

7/31/2019 Sales Tax - From Widgets to Services and Beyond

1/7

Sponsored by Avalara, Inc.Copyright 2013

SalesTax-FromWidgetstoServicesandBeyon

d


2/7

Page 2 of 7. Sales Tax From Widgets to Services and B eyond Avalara 2013

The U.S. sales tax system has transormed rom a widget, aka tangible

personal property, ocus to a widgets-and-services ocus. First, tradi-

tional services such as repairs, property maintenance and personal

services began to be taxed in states. Now, other classes o services,

reerred to as non-traditional services, are being delivered more and

more regularly in our modern economy, making them a new target orstates to consider regarding taxation.

Non-traditional services raise their own set o questions or businesses

owners concerned with taxability o the services they provide. Non-

traditional services include:

Data Processing

Inormation Services

Sotware-Related Services

The treatment o non-traditional services are guided by state regu-

lations, interpretive documents and rulings such as private letter

rulings, inormational publications or bulletins, and even by admin-istrative tribunal decisions. The authority conerred by these types o

interpretations is limited to a single state or jurisdiction. Unortunate-

ly, the lack o uniormity amongst the states results in great variances

rom state-to-state when dening what is taxable and what is not in

the non-traditional services world.

The Beyond:Non-TraditionalServices in the

Sales Tax World


3/7


According to the Collins English Dictionary, data processing is dened

as a sequence o operations perormed on data, esp. by a computer,

in order to extract inormation, reorder les, etc.1 Some states do not

specically dene data processing in their rules and regulations. O those

states that do provide a denition o data processing, they oten tend to

elaborate on the Collins plain English denition.

Some states or jurisdictions apply a more complex denition, as in the

case o our nations capital:

the processing o inormation or the compilation and

production o records o transactions; the maintenance, input,

and retrieval o inormation; the provision o direct access to

computer equipment to process, examine, or acquire inormation

stored in or accessible to the computer equipment; the specifcation

o computer hardware confgurations, the evaluation o technical

processing characteristics, computer programming or sotware,

provided in conjunction with and to support the sale, l ease,

operation, or application o computer equipment or systems; wordprocessing, payroll and business accounting, and computerized

data and inormation storage and manipulation; the input o

inventory control data or a company; the maintenance o records

o employee work time; fling payroll tax returns; the preparation

o W-2 orms; the computation and preparation o payroll checks;

and any system or application programming or sotware. 2

As is evident rom the Washington D.C. statute, a states denition o data

processing may be very broad. However, in Texas, the states rules and

regulations dene two specic types o data processing servicesthose

that are taxable and those that are not.

Some o the taxable data processing services in Texas3 include:

Accounts receivable billing

Check preparation

Data conversion services

Preparing W-2 orms, payroll tax returns and payroll checks

Transcription services

Word processing services

Scanning documents

Data Processing

1 http://www.collinsdictionary.com/dictionary/english/data-processing2 D.C. Code Ann. 47-2001(n)(1)3 http://www.window.state.tx.us/taxino/taxpubs/tx96_259.pd

With the advent of cloud computing,

raw data is rarely passed to

consultants via hard copy mediums


4/7


And a ew examples o the non-taxable data processing services

in Texas are:

Preparation o nancial statements

Preparation o ederal income tax returns

Transcription o medical dictation or records Consulting services

Auditing services including inventory counting services

Interpreting a clients data

Heading north, the ocus in Minnesota regarding data processing is on

the nature o the product delivered to the retail customer. In the land o

10,000 Lakes, tax [generally] applies to the conversion o customer-

urnished data rom one physical orm o recordation to another.4

Minnesotas denition also broadly denes data processing services that

are not taxable:

Nontaxable Services. A. Processing a clients data means the

developing o original inormation rom raw data urnished bythe customer. Examples o automatic data processing operations

which result in original inormation are summarizing, computing,

extracting, sorting, and sequencing. Such operations also include

the updating o a continuous fle o inormation maintained by the

customer with the service bureau.5

Adding to the conusion is the rate o change in the data processing eld

via technology, sotware capabilities and the expanding complexity o

data streams. For states still hampered by outdated laws and regulations

in this eld, the ability o vendors to establish certainty is even more

precarious.

Many states struggle with an outdated concept o taxable data process-

ing based on the exchange o a physical medium. With the advent o

cloud computing, raw data is rarely passed to consultants via hard copy

mediums and converted or analyzed data is usually returned via the

cloud or email. The ability to identiy taxable data processing services

becomes dicult, even or the states own employees.

4 Minn. R. 8130.9700 Subp. 3 (D).5 Minn. R. 8130.9700 Subp. 4 (A).


5/7


Inormation Services, broadly dened, is access to otherwise compiled

or organized inormation. These transactions are oten taxable, but not

always taxable under the same regime state-by-state. Identiying taxable

Inormation Services sufers rom similar challenges as ound with data

processing. Inormation Services, even when clearly dened as such, may

be subject to multiple categorizations across many states.

In Ohio, Inormation Services are taxed as though they were data process-

ing services. In Texas, the same Inormation Services are taxed as a true

Inormation Service. In other states, the dividing line between taxable

Inormation Services and exempt services is even less clear. For example,

Oklahoma specically taxes inormation bureaus, but only those that

provide output in a tangible orm. In Florida, the compilation o research

is taxable as an Inormation Service, but charges or compiling news

articles is not.

As an example, lets consider a vendor who provides inormation to

customers over the Internet. In Texas, the vendor is selling a orm o

Inormation Services or sales tax purposes, but they are only subject to

80% tax.6 In Ohio, the vendor is selling electronic Inormation Services

or sales tax purposes and taxed at 100% o value.7 In North Dakota, sales

o statistical reports, graphs, diagrams, microlm, microche, photo

recordings, or other inormation produced or compiled by a computer

and sold in substantially the same orm as it is produced, are generally

taxable under the computer sotware category, while the electronic

transmission o inormation, including mailing lists and statistical

inormation, prepared or multiple customers, is not subject to sales tax.8

In other states, the same services may be characterized as proessional or

consulting servicesand yet the vendor is selling exactly the same

service to every customer.

The bottom line: Determining whether Inormation Services alls under

taxable services is an inexact science that leaves many pitalls or the

unwary and even or the well-prepared.

InformationServices

6 Tex. Admin. Code 3.342(a)(2).7 Ohio Rev. Code Ann. 5739.01(Y)(1)(c)8 N.D. Admin. Code 81-04.1-03-11(6)(e)


6/7


State governments put a lot o emphasis on the term related or

services that bear a relationship to sotware. Items such as training,

maintenance, updates or technical support are generally considered

related to sotware in states where sotware is taxable. O course, states

that do tax sotware-related services usually only tax services connected

to pre-written or canned sotware. However, even in the canned sotwarespace, the states diverge sharply when it comes to taxability o specic

services attendant to prewritten sotware.

In Minnesota, sotware-related charges or consultation, installation

and conguration are taxable whether the actual work is done by the

sotware vendor or not.9 On the other hand, Missouri exempts sotware-

related services which are not mandatory to the customer, regardless o

who perorms the actual services.10

Software-RelatedServices

9 Minnesota Sales Tax Fact Sheet 134, 02/01/200410 Mo. Code Regs. 10-109.050(3)(F)


7/7


What CanNon-Traditional

ServicesDepend On?

For providers o modern data processing, inormation and sotware-relat-

ed services, the sales tax environment presents many challenges. Proper

identication o the services your company provides is a critical step to

achieving accurate sales tax compliance. Proper identication begins with

naming your service appropriately or its intended purpose and under-

standing the tax implications o that categorization.

Depending on the state where your company has physical presence

(nexus), your business must research existing laws and proposed laws as

they relate to the services you provide. Remember, especially in the ast

moving world o technology, just because your companys services are

not taxable today does not mean they will remain exempt tomorrow.

With recognition o the new non-traditional services elds, services have

gained a higher prole amongst the many states rules on taxability. With

the increased attention and efort on the states parts to tax non-tradi-

tional services, reaching out or sales and use tax assistance rom experts

to help classiy how your service is treated can protect your company

against a damaging tax audit. And always remember, as your company

expands into new states, always check the laws in that state regarding

your service.

When all is said and done, why risk non-compliance? Learn more

about AvaTax today. AvalaraMaking sales tax less taxing.

Avalara may have patents,patent applications, trademarks,copyrights, or other intellectualproperty rights governing thesubject matter in this document.Except as expressly provided inany written license agreementfrom Avalara, the furnishing ofthis document does not give youany license to these patents,trademarks, copyrights, or otherintellectual property.

Learn more about AvaTax today. AvalaraMaking sales tax less taxing.

Author:

SHANE RATIGAN began his career as a self-employed business owner.After 10 years in the motorcycle business, he returned to college to gain a

Bachelors in Accounting and a Bachelors in Business Administration. Hewent on to earn his Juris Doctorate at Syracuse University College of Law in

New York and his LLM Masters of Taxation at the University of Washington

in Seattle. Shane has spent several years counseling small business owners

on tax and succession planning. He is a licensed attorney in Oregon and

Washington. Shane currently works in sales tax law and sales tax compliance

with Avalara, a Software-as-a-Service end-to-end sales tax solution for

businesses of all sizes. .

Documents

Sales Tax - From Widgets to Services and Beyond