As more B2B companies deploy digital commerce and other operations on cloud technology, and as they sell more digital products, they have plenty of state tax rules to monitor.
“Two trends that have strong traction at the state level are states moving to force sales tax collection by marketplaces, and sales tax on cloud-based services and digital content,” says Stephen Kranz, a tax lawyer and partner at McDermott Will & Emery in Washington, D.C.
For cloud-based technology and services, “there are numerous examples around the country of legislation introduced and being considered to tax cloud and digital services,” he says.
For example:
- Minnesota has pending legislation on cloud services;
- Vermont is considering legislation that would repeal a cloud tax exemption and impose a new tax on “vendor-hosted prewritten computer software, or software-as-a-service;
- Colorado is considering a change in its definition of “tangible personal property” to include digital downloads, streaming and subscriptions, in effect making these digital services subject to sales and use tax;
- Georgia has introduced legislation to tax digital products including periodicals and video games;
- Kansas is considering legislation to tax digital audio works and digital books, periodicals, games and streaming services;
- Maryland is considering a tax rate of up to 10% applied to digital advertising sales.
Dealing with marketplaces
For online marketplaces, 38 states plus the District of Columbia have passed marketplace facilitator laws that set rules on how marketplace operators must collect and remit sales tax, and manage tax-exemption certificates, on behalf of sellers.
“Every state is still trying to define how exactly they want to deal with marketplaces,” says Silvia Aguirre, general manager of certificate management at Avalara Inc., a provider of tax management and compliance software and services. This includes how states are requiring the marketplace operators, or facilitators, to collect and remit sales tax on behalf of individual sellers.
One of the reasons for the laws, experts say, is to enable states to collect sales tax for a marketplace’s overall sales; without the facilitator laws, states would be hard-pressed to collect sales tax from the many small sellers on marketplaces whose annual sales don’t reach the minimum annual sales threshold that triggers sales collection duties for individual sellers.
Managing tax exemptions
The rules can also require marketplace operators to collect exemption certificates from sellers when they sell products in transactions not subject to sales tax, such as when products are sold to B2B customers for resale of products in transactions that pass the sales tax on to the end-customer.
The passage of marketplace facilitator laws “has been gaining steam over the last three years,” Kranz says, resulting in an inconsistent collection of state laws. To push for more consistency across states—with the idea of making the laws easier for marketplaces to abide by them—the National Council of State Legislators has drawn up a proposed universal model of marketplace legislation that all 39 jurisdictions could adopt.
But getting the states and the District of Columbia to buy into the NCSL’s model won’t easy after all the legislative work of recent years, Kranz says.
“It would be good tax policy if all took the same approach to marketplace laws, but that’s going to be a tough sell,” he says. “The states got 98% of what they wanted in their laws, so why would they want to revise them?
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