Did Wyoming Just Become an Internet Affiliate Nexus State?

We have written often about state Internet “click through” nexus laws, including the New York affiliate nexus statute unsuccessfully challenged by Amazon.com and Overstock.com, and the Illinois Internet affiliate nexus law stuck down by the Illinois Supreme Court in response to a suit brought by the Performance Marketing Association (for which Brann & Isaacson served as counsel). In most states, meaningful risk of Internet affiliate nexus for an out-of-state seller arises only after the legislature adopts a statute that, like New York’s law, creates a rebuttable presumption of “click through” nexus. In our view, even such a rebuttable presumption suffers from serious constitutional failings. Thus, an even more aggressive position, such as asserting that an Internet affiliate relationship, by itself, can create nexus for an out-of-state vendor without providing any opportunity to rebut the presumption, is plainly at odds with the Constitution.

On April 3, 2014, the Wyoming Supreme Court waded into the “click through” nexus arena and raised the possibility that, under Wyoming case law, the mere existence of an Internet affiliate relationship with an in-state website may be deemed sufficient to create nexus for an out-of-state retailer. See Travelocity.com et al. v. Wyoming Department of Revenue, 2014 WY 43 (Apr. 3, 2014). The case is one in an extensive series of cases around the country involving challenges to state tax assessments brought by online travel companies. At issue typically in these cases is the question of whether online travel companies (“OTCs”) are subject to a state sales/use tax collection obligation on the portion of their charge to consumers that is not paid to the hotel that provides the room (as to which tax is often collected by the OTC, paid to the hotel, and remitted remitted to the state). The OTCs have argued that the portion of the charge not paid to the hotel is a service fee collected by the OTCs, not a part of the charge to the consumer for the room.

The OTC cases raise numerous issues under both state sales and use tax law and federal constitutional principles, including substantial nexus. Since nexus requires a sufficient connection between the state and both the seller and the activity/transaction being taxed, see Complete Auto Transit Inc. v. Brady, 430 U.S. 274, 279 (1977), the OTCs have argued that nexus is lacking with regard to the transaction in question, since their sales occur on servers located outside the state in which the room is provided. In other words, the OTCs assert that the state lacks nexus with the activity being taxed, regardless of whether there is sufficient nexus with the OTCs themselves as sellers.

Supreme Court Denies Petitions for Cert of Amazon and Overstock

As we recently wrote, last spring New York State’s highest court, the Court of Appeals, issued a decision upholding the state’s Internet affiliate nexus law after a challenge made by Overstock.com and Amazon.com. The Court of Appeals found that the law, which creates a rebuttable presumption of nexus for out-of-state vendors who employ in-state affiliates, satisfies substantial nexus requirements and does not violate the Due Process clause.

In September, Overstock.com and Amazon.com sought review of the decision of the Court of Appeals by filing petitions for certiorari with the United States Supreme Court. After extensive briefing by the petitioners, the State of New York, and many amicus curiae, on December 2, the Supreme Court denied the petitions for cert. (See the cases’ status here and here.)

This ends the petitioner’s facial constitutional challenge to the New York affiliate nexus law as Overstock.com and Amazon.com have now exhausted their appellate options. The decision by the Supreme Court not to hear the case, however, does not mean that every state’s affiliate nexus law is valid and enforceable. For instance, the Illinois Supreme Court held in October that Illinois’s Internet affiliate nexus statute was preempted by the Federal Internet Tax Freedom Act. The Supreme Court’s decision Monday has no impact on the now unenforceable Illinois law.

Direct Marketing Association Re-files Challenge to Colorado Notice and Reporting Law in State Court

We have been updating readers on developments regarding the court challenge brought by the Direct Marketing Association (“DMA”) to a 2010 Colorado law that purported to require Internet retailers and other remote sellers that do not collect Colorado sales tax to: (1) give certain notices to their Colorado customers regarding the purchaser’s obligation to self-report Colorado use tax; and (2) file reports with the Colorado Department of Revenue detailing the private purchasing information of their Colorado customers. The DMA won a preliminary injunction in January 2011 in federal District Court suspending the law on the grounds that it violated the Commerce Clause. The Court later made the injunction permanent when it awarded the DMA summary judgment in March 2012. The State appealed.

In August 2013, the Court of Appeals for the Tenth Circuit ruled on its own initiative that the Tax Injunction Act (“TIA”) barred federal court jurisdiction over the DMA’s claims. The Court of Appeals did not reach the merits of the DMA’s Commerce Clause claims, but rather ordered that the claims be dismissed on procedural grounds. The Court held that the DMA was required under the TIA to bring its claims in Colorado state court. The DMA requested rehearing on the jurisdictional issue, but the Tenth Circuit declined in early October to rehear the matter. The Court of Appeals then issued a mandate to the District Court on October 9, directing the lower court to dissolve the injunction and dismiss the claims. (The District Court has not yet implemented the mandate, so for now the federal injunction remains in place.)

On November 5, 2013, the DMA re-filed its challenge to the Colorado notice and reporting law in state District Court in Denver. At the same time, the DMA moved for a preliminary injunction, in order to continue the suspension of the law after the federal court injunction is lifted. Briefing on the motion for a preliminary injunction is expected to conclude in December, with a hearing on the motion likely to be scheduled for early January 2014. The DMA will request that the state court rule on the injunction request prior to January 31, the deadline under the law for retailers to send certain annual notices to customers who purchased at least $500 in goods from the retailers in the prior year.

Brann & Isaacson partners George Isaacson and Matthew Schaefer are co-counsel to the DMA in connection with the appeal.

We will keep you apprised of further developments in the state court proceeding.

MFA Update: Rep. Goodlatte’s Seven Principles and an Interview with George Isaacson

Although the Marketplace Fairness Act (S. 743) ("MFA") has not yet progressed out of a House committee since its Senate passage last spring, it continues to make headlines. In late September, the House Judiciary Committee, chaired by Rep. Bob Goodlatte (R-Va.), released seven “Principles on Internet Sales Tax.” Brann & Isaacson senior partner George Isaacson was recently profiled by State Tax Notes discussing both the MFA and Goodlatte’s Seven Principles.

The Seven Principles outlined by Representative Goodlatte provide for:

1. Tax Relief – “no new or discriminatory taxes not faced in the offline world”
2. Tech Neutrality – brick and mortar and online businesses “should all be on equal footing. The sales tax compliance burden on online Internet sellers should not be less…than that on similarly situated offline businesses”
3. No Regulation Without Representation – taxpayers “should have direct recourse to protest unfair, unwise or discriminatory rates and enforcement”
4. Simplicity – no “onerous compliance requirements,” “laws should be so simple and compliance so inexpensive and reliable as to render a small business exemption unnecessary”
5. Tax Competition – “Governments should be encouraged to compete with one another to keep tax rates low and American businesses should not be disadvantaged vis-à-vis their foreign competitors”
6. States’ Rights – “States should be sovereign” and “the federal government should not mandate that States impose any sales tax compliance burdens” and
7. Privacy Rights – “Sensitive customer data must be protected.”

Illinois Supreme Court Rules Illinois “Click Through” Nexus Statute Is Void And Preempted By Federal Law

The Illinois Supreme Court issued its decision today in Performance Marketing Association v. Hamer, ruling that the Illinois “affiliate nexus” (also known as “click-through nexus”) law is “void and unenforceable” because it is preempted by federal law. Brann & Isaacson partners George Isaacson and Matthew Schaefer represented the PMA in this case, and Isaacson argued the case before the Illinois Supreme Court on May 22, 2013. The case was on appeal from the Circuit Court, which had had held that the affiliate nexus law was an unconstitutional violation of the Commerce Clause, and was also preempted by the Internet Tax Freedom Act (“ITFA”), because it impermissibly discriminated against electronic commerce. In affirming the lower court’s decision, the Illinois Supreme Court based its holding on a violation of the ITFA, and did not reach the Constitutional argument.

The Illinois law had purported to impose a use tax collection obligation on any out-of-state retailer or serviceman who had a contract with a person located in Illinois that paid a commission based on sales generated from referral links placed on that person’s website, provided the retailer realized a minimum in $10,000 in sales to customers through such links. Under the Internet Tax Freedom Act, states are prohibited from imposing “discriminatory taxes on electronic commerce.” A discriminatory tax is defined as a tax that “imposes an obligation to collect or pay tax on a different person or entity than in the case of transactions involving similar property, goods, services, or information accomplished through other means.” 47 U.S.C. §151 note.

The ruling is a significant victory for online retailers, and for the Illinois individuals who generate income through affiliate links.

Beware of Taxation of Advertising Inserts

During the last legislative session in Maine, the legislature approved, and Governor Lepage signed, a bill to eliminate the exemption from the sales tax for publications. L.D. 1509, 126^th Legs., Part P, (Me. 2013). This law went into effect yesterday. The law now requires the taxation of magazines and newspapers. The sleeping dog, however, is the taxation of advertising flyers and other free publications.

Taxation of free advertising materials has become a “hot button” issue in Maine. In an Informational Notice dated September 27, 2013, Maine Revenue Services stated that the costs of printing advertising flyers, including those inserted in newspapers, are now subject to the sales tax if those materials are distributed in Maine. In other words, the publisher will be required to pay a use tax, either to its printer or directly to the state, on the printing charges for advertising flyers.

Amazon.com and Overstock.com Petition U.S. Supreme Court over New York Affiliate Nexus Law

We’ve written frequently about developments in Amazon.com and Overstock.com’s challenges to the New York State affiliate nexus law (a law which has inspired similar laws in many other states). Last spring, the New York Court of Appeals, the State’s highest court, upheld the law, stating that, in regards to the parties’ Commerce Clause claims, the “statute plainly satisfies the substantial nexus requirement. Active, in-state solicitation that produces a significant amount of revenue qualifies as ‘demonstrably more than a ‘slightest presence’’” under the Tax Appeals Tribunal’s 1995 ruling in the Orvis case. The Court continued by saying that “The bottom line is that if a vendor is paying New York residents to actively solicit business in this State, there is no reason why that vendor should not shoulder the appropriate tax burden.” The Court rejected the parties’ due process claims, as well.

Late last month, both Amazon.com and Overstock.com took their challenge to the United States Supreme Court, each filing a petition for a writ of certiorari, seeking review of the New York affiliate nexus law and of the New York Court of Appeals Decision (see status of the petitions here and here). New York has until October 23 to file a response in each case. However, as the Supreme Court’s review is discretionary, it is unclear whether the matter will be actually be heard by or decided by the Supreme Court. If not, the New York decision will stand, and other states’ versions of the affiliate nexus law will not be impacted. Meanwhile, the Marketplace Fairness Act, which could, in theory, make challenges such as these moot, remains in committee in the House of Representatives.

We will continue to track developments and keep our readers posted.

Federal Appeals Court Rules Lower Court Lacked Jurisdiction to Enjoin Colorado Notice and Reporting Law; Direct Marketing Association Will Seek Rehearing En Banc

Many of our readers have been following closely the litigation challenging the Colorado law passed in 2010, which required remote sellers to inform consumers of their obligation to self-report sales and use tax and also required direct marketers to turn over to the Colorado Department of Revenue the names of their Colorado customers along with sales transaction information. In 2012, the United States District Court in Denver declared the Colorado law unconstitutional, as a violation of the Commerce Clause. The Colorado Department of Revenue appealed the District Court decision to the Tenth Circuit Court of Appeals.

On Tuesday, August 20, 2013, the Tenth Circuit issued its decision in Direct Marketing Association v. Brohl. The three judge panel hearing the case did not reach, or address in any way, the constitutional issues in the case. Instead, the Court ruled solely on the question of whether the District Court had jurisdiction to hear the case.

Although the jurisdiction of the federal courts was not contested by the parties, the appellate court concluded that the United States District Court in Denver did not have jurisdiction because of the so-called Tax Injunction Act (28 U.S.C. sec. 1341) (“TIA”). This jurisdictional statute prevents federal courts from entering judgments that restrain the collection of state taxes, and the Tenth Circuit ruled that it applied in this case. The Court stated that the challenge to the constitutionality of the Colorado law must be filed in state court rather than federal court. Therefore, the Court of Appeals remanded the case back to the District Court and directed it to dismiss the DMA’s Commerce Clause claims and to dissolve the permanent injunction against the Department of Revenue’s enforcement of the law.

Judge Enjoins Cook County from Enforcing Use Tax

We write frequently about the difficult task retailers face in complying with the myriad state and local tax regimes in this country. State and local tax rules are ever changing, both through legislative and regulatory efforts and also through actions of administrative bodies and even the courts. For your average retailer, keeping abreast of every change can be near impossible.

For instance, last November, Cook County, Illinois approved a use tax ordinance that went into effect April 1, 2013, and imposed tax on non-titled personal property purchased outside the county for use within the county. The Cook County use tax rate was set at 1.25%, while the County’s sales tax rate on similar purchases made inside the county was only 0.75%. The language used in adopting the use tax plainly stated the County’s purpose in adopting the new tax: “WHEREAS, it is in the interest of Cook County to take steps that will level the playing field among business interests, close tax loopholes, and incentivize the purchase of non-titled personal property within the County for use within Cook County.”

Vermont Reverses Course on Cloud Computing

A little over a year ago, we wrote in this space about the State of Vermont’s moratorium on the taxation of cloud computing in the form of software as a service, or SaaS (“pre-written software accessed remotely” in the state’s terminology). The moratorium had been enacted in the wake of outcry from Vermont-based software companies, who objected to assessments for unpaid taxes on SaaS charges going back to 2006, based on a technical bulletin issued by the Department of Taxes in 2010.

At the time the moratorium was passed in 2012, there was some support for permanently exempting SaaS from Vermont’s sales and use tax, and Vermont’s governor had come out in favor of an exemption. A special study committee set up to make recommendations to the legislature on the issue also supported exempting SaaS from taxation. However, legislators were ultimately unable to agree on cuts elsewhere in the budget to make up for loss of anticipated revenue from SaaS taxes. As a result, the moratorium was allowed to expire, meaning that, as of July 1, charges for SaaS are taxable in Vermont. Because the moratorium applied only to taxes on SaaS, its expiration does not affect the tax treatment of other types of cloud computing, such as infrastructure as a service or IaaS.

Despite Prior Veto, Missouri Governor Signs Click-Through Internet Affiliate Nexus Provision into Law

As we reported last month, on June 5, Missouri Governor Jay Nixon vetoed a bill that included an Internet affiliate nexus provision. What a difference a month makes. On July 5, Governor Nixon signed a different bill, S.B. 23, that amends Missouri’s definition of “engages in business activities in this state” under Mo. Stat. § 144.605(2) to add a presumption of nexus for retailers with “click-through” online advertising agreements with residents of the state. Under the Missouri statute, “a vendor shall be presumed to engage in business activities within this state if the vendor enters in an agreement with one or more residents of this state under which the resident, for a commission or other consideration, directly or indirectly refers potential customers” to the vendor by an Internet link or otherwise, so long as the vendor realizes at least $10,000 in sales from such referrals. The presumption may be rebutted by submitting proof that the affiliates were not engaged in activities that were significantly associated with the retailer’s ability to make or maintain a market for sales in the state. In particular, such proof may consist of “sworn written statements from all of the residents with whom the vendor has an agreement stating that they did not engage in any solicitation in the state on behalf of the vendor during the preceding year.” See Mo. Stat. 144.605(e), (f).

The Missouri statute continues a disturbing trend among state “click-through” Internet affiliate nexus laws under which a presumption of nexus is created regardless of whether the compensation paid to the in-state affiliate is based on sales completed by the retailer. Statutes recently enacted in Kansas, Maine, and Minnesota contain similar language, as do statutes already on the books in Arkansas, North Carolina, Rhode Island, and Vermont (although Vermont’s statute is not yet in effect). By the plain terms of such statutes, a passive “pay-per-click” advertising arrangement would be sufficient to create a presumption of nexus. Such a presumption is inconsistent with the reasoning of the New York Court of Appeals’ decision upholding the New York affiliate nexus law. See Overstock.com, Inc. v. Department of Taxation and Finance, 20 N.Y.3d 586 (2013). In Overstock, the Court emphasized that “no one disputes that a substantial nexus would be lacking if [in-state] residents were merely engaged to post passive advertisements on their websites.” 20 N.Y.3d at 596. These several states’ affiliate nexus statutes are at odds, on their face, with this fundamental principle.

Affiliate Nexus Law Update: Minnesota and Maine Approve New Statutes, Missouri Governor Vetoes Bill

While the Marketplace Fairness Act sits in committee in Congress awaiting hearings, two more states have enacted affiliate nexus statutes imposing tax on remote sellers. The governor of another state, however, declined to add his state to the list of jurisdictions enacting counterproductive, and arguably unconstitutional, “click through” nexus laws. Below is a quick round up of recent news in Minnesota, Maine, and Missouri:

Last week, Minnesota Governor Mark Dayton signed into law a click-through nexus bill which creates a rebuttable presumption for out-of-state retailers with in-state affiliates and which goes into effect for sales made after June 30, 2013. The new law states that an out-of-state seller is presumed to be soliciting sales in the state if it enters into an agreement with a resident for a commission or other similar consideration for referrals of potential customers, whether by a link of a website or otherwise. The presumption only applies if the seller has at least $10,000 of gross receipts in the 12 month period preceding the calendar quarter in which the sale is made. Sellers can rebut this presumption with proof that the resident did not engage in any solicitation on behalf of the seller that would satisfy the nexus requirement under the Constitution. The same bill also imposes tax on certain specified digital products which previously were exempt from sales tax.

Illinois Update: Oral Arguments Heard in PMA v Hamer

On Wednesday, May 22, 2013, the Illinois Supreme Court heard oral argument in Performance Marketing Association v. Hamer.  The Court heard the State’s appeal from the ruling of the Cook Country Circuit Court that the Illinois Internet affiliate nexus law is unconstitutional.  Brann & Isaacson senior partner George Isaacson argued the case on behalf of the PMA.  A video of the oral argument is posted on the Court’s website.  Isaacson’s portion of the argument begins at 21:20 of the Court’s video.

Senate Passes Marketplace Fairness Act

By a vote of 69 to 27, the U.S. Senate on May 6 passed the Marketplace Fairness Act (“MFA”). The MFA would authorize states and other taxing jurisdictions that meet minimal tax simplification requirements to impose a sales/use tax collection obligation on Internet retailers and other remote sellers. The final version of the bill expanded the original scope of the authorization to include tribal organizations, in addition to states, US territories, and the District of Columbia. No additional simplification measures were added by the Senate, leaving a bill that does not require genuine reform of state and local sales and use tax systems. Nor did the Senate raise the threshold for the small seller exemption above $1 million in total US sales, leaving small businesses vulnerable to costly and burdensome compliance and tax administration requirements. As any business put through the rigors of even a single state’s audit process knows, the specter of more than 45 audits each year can be enough to cripple a smaller Internet or catalog vendor.

The MFA now moves to the House of Representatives, where the prospects for passage are less certain. Some Republican representatives have voiced support for the bill, however. Ecommerce sellers interested in the bill should contact their representatives to make their voices heard, before the bill becomes law. We will continue to update our readers on developments concerning the MFA.

Not So Simple–Recent Developments in Taxing the Cloud

We write frequently about developments surrounding federal tax legislation such as the Marketplace Fairness Act, which is up for a vote before the Senate on May 6. One of the major issues critics have with the Act is that despite proponents’ claims, it fails to provide for real simplification of state and local tax regimes, such as a uniform tax base among the states. Without a uniform tax base, compliance is incredibly complex for even the savviest of retailers.  The problem is much worse with respect to computing services and digital products delivered over the Internet.

For instance, cloud computing has some of the murkiest tax rules – some states have issued clear statements regarding taxability of IaaS, SaaS, or PaaS, but few have addressed all types of cloud services and many have failed to address the issue at all. Retailers are left guessing at the proper tax treatment of their sales and hoping their interpretation of tax rules is the correct one. That tax rules are ever-changing does not help matters. A uniform tax base would lessen this problem. Instead, retailers must monitor developments in myriad jurisdictions to find some clarity, although tax treatment still varies from state to state.

Idaho, for instance, recently exempted SaaS from sales and use tax by amending its statute to exclude “software accessed over the internet or through wireless media” from the definition of tangible personal property. See Idaho Code § 63-3616(b). Previously, the statute included as taxable tangible personal property any non-custom computer program “regardless of the method by which the title, possession or right to use the software is transferred.” The Idaho State Tax Commission interpreted this language as imposing tax on SaaS, although it noted in its opinion that “Due to the complexity of the business models, it is not possible to provide an all inclusive list of taxable sales transactions or taxable uses. As this technology advances, it may introduce more rather than less certainty.” Cloud Computing and Related Software Sales and Use Tax Issues (10/22/2012) (emphasis added). Even when providing some now-moot clarity to the taxability of SaaS, the state had to admit that its interpretations could not be considered definitive or final.

Kansas Enacts Internet Affiliate Nexus Law

On April 16, 2013, Kansas Governor Sam Brownback signed SB 83, which includes a provision patterned after the New York Internet affiliate nexus law recently upheld by the New York Court of Appeals in Overstock.com v. New York Department of Taxation and Finance. The law amends the definition of “retailer doing business in the state” in K.S. § 79-3702(h)(1) to create a presumption of nexus if a retailer enters into an agreement with one or more Kansas residents under which the resident, for a commission or other consideration, refers customers to the retailer “by a link or an Internet website, by telemarketing, by an in-person oral presentation, or otherwise.” The presumption will apply so long as the cumulative gross receipts of the retailer for sales to Kansas customers purchasing through such referrals is at least $10,000 in the preceding 12 months. The presumption may be rebutted by a retailer submitting proof that the affiliates did not engage in activity that is significantly associated with the retailer’s ability to make and maintain a market in the state. Such a rebuttal “may consist” of sworn statements obtained from all affiliates that they did not solicit sales in the state on behalf of the retailer. The law takes effect 90 days after enactment, or on July 15, 2013. Ecommerce vendors should evaluate their Kansas affiliate relationships to determine how to respond to the law.

Despite Unconstitutionality, Kentucky Enacts Consumer Use Tax Notification Requirement for Out-Of-State Retailers

On April 4, 2013, Kentucky Governor Steve Beshear signed into law HB 440. The bill includes an amendment to Kentucky’s tax code which will impose a new requirement on every retailer that makes sales into Kentucky from outside the state and that is not required to collect Kentucky use tax. The law requires that these retailers provide a notice to their customers that Kentucky purchasers are required to report and pay use tax directly to the Kentucky Department of Revenue. A similar provision enacted in Colorado in 2010 as part of a broader notification and reporting bill was declared unconstitutional by a federal judge in Direct Marketing Association v. Huber, a case now on Appeal before the 10th Circuit Court of Appeals. Brann & Isaacson is counsel to the DMA in the Colorado litigation.

While three other states—Oklahoma, South Dakota, and Vermont—have similar consumer use tax notification requirements on the books, Kentucky’s new law is more aggressive:

First, on its face, Kentucky’s law requires retailers to use “the exact required use tax notification language” set forth in the statute concerning compliance with Kentucky law, and does not include a substantial compliance provision likes other states. According to the statute, even if a seller already has a notice provision for other states, that notice provision is only adequate for purposes of Kentucky law “if the consolidated notification meets the requirements of this section.” In other words, only the “exact” language of the Kentucky law, and not something substantially similar that a retailer adopts in response to another state’s notification law, appears to be allowed.

Senate Approves Non-Binding Budget Amendment Supporting Imposition of State Use Tax Collection Requirements on Remote Sellers, But Genuine Simplification Still Sorely Needed

On Friday, March 22, the United States Senate approved a non-binding amendment to the Senate budget resolution, by a vote of 75-24. The non-binding amendment expresses support for the adoption of a federal bill authorizing states to impose use tax collection obligations upon out-of-state retailers without regard to whether the retailers have a physical presence in the state. The Senate did not vote on an actual bill specifying the terms on Congressional authorization for expanded state use tax collection authority.

E-commerce vendors and other remote sellers interested in the legislation should contact their representatives in Congress to ensure that any federal bill considered for adoption guarantees meaningful uniformity and simplification of existing state sales and use tax systems. The bill currently before Congress, the so-called Marketplace Fairness Act, fails to include fundamental simplification measures, such as requiring one tax rate per state and uniform tax bases and exemptions, providing for vendor compensation, implementing consistent and coherent sourcing rules for products and services, and harmonizing state sales tax holidays. Readers can find out more about true sales and use tax simplification here.

We will continue to follow developments on federal legislation.

April 1: BC to Revert to the PST While PEI Implements HST

We post here occasionally about developments in the Canadian tax system to keep our readers aware of important changes and new requirements.

For instance, back in 2011, we wrote that voters in British Columbia had decided to discontinue the Harmonized Sales Tax (HST) and return to the provincial sales tax, or PST. As part of this deharmonization, BC taxpayers had to repay the $1.6 billion of transitional funding received from the federal government. BC officials also had to re-implement the PST. Officials have completed their work and BC will revert back to the PST on April 1. (Taxpayers, of course, will still owe 5% GST on certain goods and services after April 1, as well.) Current PST laws and regulations are all now available on BC’s PST website here. Retailers are also required to register for the PST and can do so online here. Note that even if a business was registered under the prior PST, that business must now re-register.

Traps for the Unwary: Taxation of Digital Products

Recently, I presented at a webinar hosted by Strafford Publishing on the subject of sales and use tax on digital products and services.  It almost goes without saying that the interstate sale of digital products—whether books or software—is complicated, if for no other reason than it requires analyzing the sales and use tax consequences of such transactions based upon forty-five states’ (and the District of Columbia’s) sales tax laws, which were adopted long before the advent of the digital age.  For example, the starting point for sales tax analysis in most states is whether the transaction involves the sale of “tangible personal property.”  Is a digital product such as a digital book that is downloaded by the customer tangible personal property?

The states do not provide for uniform treatment of the taxability of digital products from state to state, nor are all digital products taxed similarly within a given state.  Colorado, for example, taxes digital books and music, but does not tax digital software.  Twenty-five states tax digital books, music and videos, while thirty states tax prewritten software.

What makes analysis in this field even trickier are the different methods of delivery of digital products and the various pricing plans under which such products are sold.  For example,  under one delivery method, the seller provides the buyer an electronic access code to permit the buyer to download the digital product at the buyer’s convenience.  For a sale such as this, in addition to analyzing whether the underlying product is taxable, the seller must also determine whether the sale of the access code is taxable at the time of such sale.  The SSUTA, of which there are 24 member states, treats the sale of a “digital code” that entitles the purchaser to download a taxable digital product as a taxable transaction.  See Section 332(G).  But not every state, of course, is a member of the SSUTA and non-member states do not always follow this principle.  For instance, the non-member states of Texas, New York, and Illinois treat the sale of such access codes as tantamount to selling a gift card.  These states treat the sale of a gift card or access code as the sale of an intangible.  It is only when the gift card is redeemed that a taxable sale of tangible personal property has occurred.  See, for example, Ill. General Information Letter ST 10-0052-GIL (June 4, 2010).