Join Ellen Minnig, Tax Director at PKF Mueller, for an in-depth interview on the taxation of digital goods. In this episode, Ellen provides insight on what digital goods are, key takeaways, and what to expect next.
[00:00:00] Ashley: Hi, I’m Ashley and you’re listening to the “Business Owner’s Guide podcast: Tips, Trends, and Talks from a CPA.” Today we welcome Ellen Minnig from our Tax Department for discussion on digital goods. But before we begin, let’s find out more about our guest.
[00:00:20] Ashley: Ellen is a Tax Director here at PKF Mueller and has over 20 years of tax experience in public accounting and industry work. She is also a key member of the Firm’s State and Local Tax Group.
[00:00:36] Ashley: Ellen, thank you so much for joining us today.
[00:00:38] Ellen: Of course. Thanks for having me.
[00:00:41] Ashley: Can you start off by telling us what digital goods are?
[00:00:44] Ellen: Sure. This is a new area of tax that’s growing every month. Just more and more states picking it up. And generally digital goods are defined differently by different states.
[00:00:57] Ellen: The standard definition of digital goods is basically audio books, videos, uh, kind of what you would think as entertainment, marketing products, but many states are expanding that definition to include advertising software, uh, custom software products and other reports that are issued by for instance, professionals, such as architects.
[00:01:22] Ellen: Um, so the, the, the definition is really expanding as we speak.
[00:01:27] Ashley: Awesome. Can you also tell us what software as a service is?
[00:01:31] Ellen: So Ashley software as a service is another area that is under scrutiny by states, uh, and is being taxed more and more by many states and basically software as a service, includes, the provision of some kind of service along with usually canned software and that software is used by the seller to provide the service.
[00:01:57] Ellen: So it usually is not licensed to the buyer, but it’s, it’s used by the seller and in combination with their service, it provides, uh, some sort of product to the buyer and that product is now taxable.
[00:02:13] Ellen: Um, this could be anything from uh, payroll service to data processing, uh, to other compilations of data for the client. And since this is provided as a package, um, the portion that is software or, uh, a product as in a report or something transmitted to the client, that part of the product is, uh, uh, digital goods and it’s included also in sales tax regime now.
[00:02:43] Ashley: As a follow up to that, can you also tell us what platform as a service is?
[00:02:47] Ellen: Platform as a service is basically a sale, um, of the underlying software and the platform that is used to network that software to a buyer. And then a service is provided along with that platform, which is installed or assembled for the buyer.
[00:03:10] Ellen: So the service is ultimately provided by the seller on the software, but the platform as a whole is sold. And there may be related installation at the buyer’s premises or, uh, in connection with their network.
[00:03:28] Ashley: Does it matter if the sale and services involve canned or pre-written software, custom software, or licenses?
[00:03:36] Ellen: Yes. That’s a good question. It does matter because generally all 50 states. Uh, including California attacks, canned software so if, for instance, you, you buy a disk and install it, uh, or download a program and purchase that program and install that on your computer.
[00:04:02] Ellen: That is a canned software application and every state taxes that as tangible personal property that you have purchased.
[00:04:12] Ashley: What are states doing to provide methods of taxing these areas?
[00:04:16] Ellen: One thing states are doing is they’re, they’re distinguishing between different types of software. So for instance, a canned software that would not be altered by the purchaser, uh, that kind of software such as buying, downloading a program onto your computer so that you can use it, say to prepare your taxes, that kind of software tends to be taxable across the board for sales tax purposes in every state But more custom software.
[00:04:49] Ellen: Which is designed particularly for a certain client and includes features that are specific to that client is not taxed by every state, only about 17 states tax, that kind of software. So one way the states are getting at, uh, making more revenue and applying sales tax to these different types of products is by distinguishing are they already, uh, ready to use? Is it a video of a movie that, that they’re marketing or is it a presentation that they’ve recorded and they’re selling to you on either a downloadable application or a disc, or is it, is it customized in the more customized, the more the states are a little more reluctant to call that a digital good and apply tax.
[00:05:38] Ashley: Is sales and use tax the main focus?
[00:05:41] Ellen: Sales and use tax is the big focus in this area because traditionally in order to apply sales tax, you would need to, uh, have a tangible, good, tangible, personal property. And for a long time, anything internet or computer based, um, was considered more of an intangible type property and was not taxed. Now, many states are defining, uh, this type of property as tangible personal property.
[00:06:12] Ellen: Including digital products, including canned software, custom software and a variety of other, uh, internet or computer-based applications. And because of that, it’s easy to apply a sales tax when they, when they sell, uh, either your right to use the service, or they provide a service along with those kinds of goods.
[00:06:37] Ashley: How is the multi-state tax commission involved?
[00:06:40] Ellen: The multi-state tax commission is a commission that helps states, uh, be more uniform, uh, and their laws, more understandable state to state. Um, there, there are 23 members states of the multi-state tax commission. And when I say member, that means these states generally, uh, agree to abide by the, the main purposes of the commission, which are two make laws, more uniform and understandable across the nation.
[00:07:13] Ellen: And they can adopt certain definitions and, uh, use specific tenants of the multi-state tax commission in their operations. And because of that, uh, in the digital and software as a service area, a number of states have adopted these multi-state definitions, which are very helpful at making things more uniform and basically giving, you know, consumers better notice about what they might be taxed on.
[00:07:42] Ashley: Which states are most aggressive in these areas?
[00:07:45] Ellen: That’s a good question. It’s important to look at. State set are, are very comfortable with taxing digital goods, software as a service and, uh, other forms of digital or internet or computer-based goods. And, and these states are generally some of the more aggressive states across the board.
[00:08:09] Ellen: Um, these include Alabama, uh, Connecticut, DC, Hawaii. Idaho, Indiana, Kentucky, Louisiana, Minnesota, Wisconsin, extremely aggressive, uh, the state of Washington and another, uh, area where I see a lot of new developments are, uh, South Carolina, Ohio and New Mexico.
[00:08:34] Ashley: What is expected to come next?
[00:08:36] Ellen: That’s a great question. I think the main concern with digital goods, taxation, uh, is that traditionally this was more of an intangible area and it it’s harder to ascertain what is being sold and how it’s being sold.
[00:08:52] Ellen: So that becomes an issue with better, you know, we need better definitions and better notice of what states are doing and are they overreaching by taxing products that essentially are our souls into the state and, and never really have a tangible, uh, presence. As in, they’re not a disc there they’re transplanted over the internet.
[00:09:17] Ellen: They’re installed, uh, via internet and not, not through direct contact with any particular person. And I think that biggest development we’re going to see is more standardized definitions. More concerned towards good definition. So we understand what the state is taxing. And I expect many more states than currently.
[00:09:43] Ellen: There’s about 25 states that tax digital goods. I expect another 10 to 15 over the next few years. Well, we’ll jump on board with that. And I also expect that out of the many states that are already taxing software as a we’ll, we’ll get most of the states on board with that as well. Um, given, you know, the new, um, it’s a new age, it’s not an age of doing everything in person anymore.
[00:10:12] Ellen: So I think those definitions will be really helpful. And, um, some of the lawsuits related to how can you tax me on this product? I, I don’t understand, you know, what the product is exactly that you’re taxing or how much of the service is, uh, how much of the cost of what I’m paying is a service, as opposed to a good and a variety of questions that have, you know, resulted in several lawsuits.
[00:10:39] Ellen: I think those will get resolved. So we’ll have a little more guidance about. How far can states go to tax these products and then another overlying, um, sort of, uh, uh, legal blankets, so to speak over the, the whole area is that the Wayfair case, allowing states to tax companies that don’t ever enter their state in terms of, uh, physically.
[00:11:06] Ellen: Entering the state or establishing an office or, um, having employees there they’re just selling into the state via the internet. I think that case is, is kind of an overall blanket on, you know, how much can we, can we tax these items? And if. Uh, if a particular seller is over a threshold amount in that state, and for most states, that’s a hundred thousand dollars in sales into the state.
[00:11:34] Ellen: If a particular seller is over that amount, then they should really start to look at this. And if the sales increase in a variety of states, have it analyzed.
[00:11:43] Ashley: My last question for you, Ellen is, do you have any case studies or examples of digital goods that you’ve recently worked with?
[00:11:51] Ellen: Sure. I I’ve worked with a number of specific case studies and, and different treatments. And one of the, one of the bigger areas that’s under scrutiny right now by the courts is Maryland’s digital advertising tax.
[00:12:07] Ellen: And some, some fairly serious constitutional challenges have been made to this tax because in order to calculate the amount of the tax, uh, sales from a global tax income base or use, and because of that, the challenges have been, um, why can’t, why can you tax me on something that is, is based on another country’s, you know, purchase of my product.
[00:12:47] Ellen: And that’s a good question. And we’re waiting to see how these cases will be resolved. And if states can go as far as to use a base that includes foreign income in order to come, come up with a sales tax rate. So that’s one big area where we’ve got a couple of cases pending. Um, generally a lot of these cases are based on, um, making sure that the laws are clear that, that, um, there, isn’t a lack of notice on the part of the states to provide clarity as to what they’re going to tax and when, and so as those cases move along, I think we’ll get more clarity into, you know, how much is too much.
[00:13:41] Ellen: And, and when do they need to be more careful in terms of taxation and assessments, and then we’ll also see, um, you know, maybe a little more reticence on the state’s part before taxing.
[00:13:58] Ashley: Great. Well, I think this was a really great overview of digital goods. And thank you for your time today.
[00:14:03] Ashley: If any of our listeners have any questions or would like to learn more, would you please share how they might be able to reach you.
[00:14:08] Ellen: Sure. Um, they can get in touch with our group, um, at SALT@pkfmueller.com and that’s S A L T@pkfmueller.com.
[00:14:23] Ellen: Also, you can reach me at email@example.com Or give me a call at (312) 975 1646
[00:14:35] Ashley: And thank you to our listeners. Don’t forget to visit us www.pkfmueller.com to learn more about our firm’s services. You can also follow us on social media for more updates, insights, and upcoming events.