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What am I selling? Properly characterizing technology
This edition of Inside Deloitte discusses the application of sales and use taxes to emerging technology, arguing that proper characterization is important for vendors analyzing potential tax obligations, offering approaches for those characterizations.
- Characterizing tax technology
- Excerpts from the article
- Meet the authors
- Join the conversation
- Related topics
Characterizing tax technology
Technology companies that have developed new and unique products and services need to describe them in ways that customers can understand. Often, those companies describe their products using general terms and phrases, such as software as a service (SaaS), a cloud computing solution, or the Internet of things. While these terms and phrases may be more recognizable when marketing, they also may oversimplify the functionality of the electronically delivered products, resulting in many companies misunderstanding their underlying state or local sales and use tax obligations.
Technology companies face the challenge of how to characterize their products using antiquated sales and use tax concepts adopted long before the digital revolution.
Excerpts from the article
Sales taxes are generally transaction taxes imposed on the retail sale of tangible personal property and some services in 45 states and the District of Columbia. Use taxes complement sales taxes and generally are imposed on the storage or use of the same taxable products and services where the purchaser did not pay sales tax to the retailer or purchased from an out-of-state vendor while paying a lower rate of sales tax than the in-state rate. From a policy perspective, complementary use taxes are generally intended to prevent purchasers from avoiding sales tax when they have purchased products out of state—then brought the products into another state for use.
While sales and use taxes are generally levied on or passed on to consumers, collection and remittance generally falls on vendors. If a vendor has nexus with a state, it is often required to collect sales or use tax from the purchaser and report and remit that tax to a tax authority. When an out-of-state vendor lacks nexus with a state or has not otherwise collected tax, the customer is generally required to self-report and remit the applicable use tax directly to a tax authority, which may not occur.
In a typical sales and use tax transaction, a vendor is a passthrough conduit for tax otherwise due; that is, the vendor collects the tax from the customer and remits it to the tax authority for its customers. Accordingly, a vendor analyzing its sales and use tax collection obligations might consider using a three-step approach. First, the vendor must determine where it has nexus to require compliance with a jurisdiction’s sales and use tax laws.
Second, the vendor must determine whether its products and services are taxable in that tax jurisdiction. Finally, the vendor must estimate the sales and use tax exposure in jurisdictions of noncompliance where it has nexus, using historic taxable sales made during statute of limitations or look-back periods as defined by each state.
When sales and use taxes were first imposed in the 1930s, the second step was relatively easy because characterization of a product, which determines whether its sale or use is taxable, was fairly straightforward. That is, if the customer had purchased tangible personal property, the transaction was generally taxable unless an exemption applied. By contrast, if the customer had purchased a service, the transaction was generally not subject to or was exempt from sales and use tax in nearly all jurisdictions.
To read more about the different approaches to the application of sales and use taxes to emerging technologies, download the full article above.
If you have questions regarding this edition of Inside Deloitte, please contact:
Stephanie Csan, director, Deloitte Tax LLP
Stephanie Gilfeather, manager, Deloitte Tax LLP
Jessica Backer, staff, Deloitte Tax LLP
John Ormonde, staff, Deloitte Tax LLP
The authors thank Valerie Dickerson, Tom Cornett, Moira Pollard, Holly Love, and Whitney Lessman for their contributions to and review of this article.