Without a doubt, technological innovations have changed many aspects of people's lives. For example, people can use their phones to hail cabs, track their location, and pay their fare. They can read the latest news or books and rent movies from the comfort of their homes, sitting in a café, or traveling on an airplane. Unfortunately, these technological innovations create complex sales and use tax issues for businesses, consumers, and tax agencies.
Two of the most ubiquitous technological innovations—digital content streaming services and technology platform services—have garnered increased attention by states and the general public in recent years. Digital content streaming services involve the temporary transmission of digital content such as videos, music, or games, commonly provided through online streaming services such as Amazon Prime, Apple Music, Hulu, Netflix, and Spotify. These streaming services are different from traditional sales of digital media, where content is permanently downloaded and owned by the purchaser. Technology platform services encompass the technology and software processes through which vendors market products to consumers. Online marketplaces such as Airbnb, eBay, Godaddy.com, Hotels.com, and Uber are just a few examples of businesses that offer technology platform services.
To understand sales tax treatment of digital content streaming and technology platform services, the answers to the following questions are key:
- What exactly is being sold?
- Who is doing the selling?
- How do the states define and, hence, tax transactions?
- If a tax does apply, who is responsible for collecting it?
At face value, these questions would appear to have simple answers. However, this column includes examples and scenarios from different states that demonstrate the contrary, and it illustrates the various approaches those states follow.Digital Content Streaming Services
As the trend for streaming content continues to grow, many consumers do not pay for permanent possession of content but rather for a subscription to a content library. As the following examples in Chicago, Florida, and Idaho demonstrate, there can be significant differences in the tax treatment of streamed (or rented) content among jurisdictions.
Chicago Amusement Tax
The Chicago Department of Finance in a 2015 ruling addressed the taxability of digitally streamed content under its amusement tax statute.1 The ruling advised that the amusement tax applies to charges for the "privilege to witness, view or participate in an amusement . . . in person [or] . . . that [is] delivered electronically," including the viewing of television shows, movies, videos, music, and games delivered online or otherwise. The tax applies to charges to a customer who has a residential street address or primary business address in Chicago as evidenced by a credit card, billing address, ZIP code, or other reliable information. Interestingly, the amusement tax does not apply to sales of shows, movies, videos, music, or games that are permanently downloaded. The tax applies only to rentals typically streamed online or downloaded temporarily.
Florida Communications Services Tax
Instead of taxing streamed digital content as an amusement, the Florida Department of Revenue in 2014 determined that charges for streamed or rented digital video content are taxable as communications services subject to the Florida communications services tax.2 The communications services tax is similar to a sales tax, but it applies to specific communications services. Interestingly, permanent downloads of digital content are not subject to either the communications services tax or the sales tax. It is important to note that Chicago and other jurisdictions tax a wide array of streamed media, but Florida has specified that only streaming video content is taxable, while other types of streaming digital content are not taxable.
Idaho's Streaming Services Exemption
Idaho in 2015 amended its statute to clarify that streaming services are not subject to indirect taxes. Further, the amended statute removed the term "digital videos" from the definition of "tangible personal property" to further clarify that broadcast television services, through both cable and satellite methods, as well as traditional forms, are not subject to sales and use tax.3 Permanent downloads, however, are taxable.
These examples demonstrate how similar digital services and products can be disparately classified and taxed. The same content could be subject to a sales and use tax, an amusement tax, a telecommunications tax, or no tax at all, depending on the jurisdiction. While these three jurisdictions provided guidance, many jurisdictions are silent on how to tax these transactions.Technology Platform Services
The proper taxation of technology platform services can be even more challenging to determine than the taxation of digitally streamed content. While digitally streamed content is difficult to classify and tax, at least most consumers understand what is being purchased. Technology platforms, on the other hand, are difficult to define even outside tax. As stated above, technology platforms include technology and software processes on which other services are based. The definition is inherently broad, which often leads to uncertainty.
When deciding how a platform should be classified and taxed, providers and consumers must ask what is being purchased. Is the purchaser obtaining access to software that the purchaser will control and use, or is the provider using the technology and software to perform its services, with the purchaser obtaining access to the services via the technology? These are often difficult questions to answer.
Consider popular ride-hailing apps. Passengers are not charged a separately stated fee for using the app to hail a driver. However, vehicle drivers must pay a percentage of total fares to the app provider. Is this percentage a commission or a payment for the use of the platform and the accompanying software? Are drivers using and controlling the apps or platforms used to generate and track leads, provide GPS guidance, and process payments? Is the platform provider using its technology to provide a commissioned service of linking drivers and passengers? The answers to these questions may provide insight into how sales and use taxes should apply.
Missouri provides a good example of what a state and a taxpayer must consider when a platform is involved. The Missouri Department of Revenue in 2015 ruled on the taxability of a platform company that provides text-message ordering services for restaurants, coffee shops, hotels, and other hospitality service industries.4 For restaurants, diners use the platform to order food via text messages to a unique telephone number provided by the platform company. The text messages come into the provider's platform and are then sent to the restaurant via a dashboard on a computer at the restaurant. The restaurants that use the service pay the platform company a monthly service fee.
Missouri ruled that the services provided to the restaurants by the platform company constitute a taxable telecommunications service because the services are similar to the types of services offered by traditional telecommunications providers. The state determined that the platform provider was using its technology to perform a taxable service.
Another issue for platforms is the collection responsibility for sales taxes on the items being sold or provided via the platform, especially if the platform is the mechanism for collecting money from the platform users' customers. This issue affects online marketplaces and online stores that allow buyers and sellers of many products or services to engage in transactions. For example, an online auction site generally is not the party selling goods and services—rather, the platform user is the party making the sale. The auction site receives a commission or a fee when an individual makes a sale using its website. This type of transaction raises the question of who is responsible for collecting and remitting the sales tax.
The Rhode Island Division of Taxation addressed this issue in Notice 2015-15, advising that hosting platforms that connect buyers and sellers of short-term residential rentals must register with the Division of Taxation and charge, collect, and remit applicable sales and hotel occupancy taxes.5 This change clearly affects popular hosting platforms that maintain an extensive network of renters via their website and smartphone apps. These platforms now are required to collect and remit sales and hotel occupancy taxes; previously, the platform had no tax collection obligation in the state. Although relatively few states have enacted similar rules for rental platforms, the implications for these types of transaction taxes are far-reaching.
In his 2015 budget proposal, Gov. Andrew Cuomo of New York sought to amend the sales tax statutes to require marketplace providers to collect and remit sales taxes on sales to customers in New York.6 Under the proposal, a marketplace provider would have been defined as someone who "facilitates a sale, occupancy, or admission" by the seller. The proposal was removed during the course of the budget process but not before it generated debate among multiple parties. Despite its removal from the final budget, the proposed language highlights states' emboldened attitudes in light of budget shortfalls and elevated pressure to find new sources of revenue.
The questions of what is being sold, to whom an item is sold, how and where an item is sold, and who is responsible for collecting and remitting the tax are interconnected. This is particularly true of platform services. As technology advances, it becomes increasingly difficult to answer these questions.The Takeaway
As the above discussion illustrates, state and local governments are using different approaches to address the taxation of digitally streamed content services and technology platform services. Similar to other internet products and services, disparate jurisdictional guidance leaves businesses, consumers, and tax practitioners—as well as tax agency representatives—wondering how to apply existing tax laws and guidance in a fair and balanced manner.
While some taxing jurisdictions have provided much-needed guidance, the lack of consistency raises the specters of double-taxation and tax delinquency. In these cases, providers of those online products and services must attempt to conform to broader classifications that do exist or take the sometimes risky position that no tax applies. Accordingly, all parties impacted by the challenges of dealing with the digital economy must remain vigilant and informed of tax laws, regulations, and administrative guidance.
1City of Chicago Dep't of Fin., Amusement Tax Ruling No. 5 (6/9/15).
2Fla. Dep't of Rev., Technical Assistance Advisement No. 14A19-005 (12/18/14).
3Idaho Code §63-3616, as amended by 2015 H.B. 209 (effective 4/1/15).
4Mo. Dep't of Rev., Letter Ruling No. LR 7561 (5/15/15).
5R.I. Dep't of Rev., Div. of Tax'n, Notice 2015-15 (September 2015).
6N.Y. 2015-2016 New York State Executive Budget, S. 2009, Part X, §1 (1/21/15).
|Sarah McGahan is a senior manager, state and local tax, with KPMG LLP in Washington. Jennifer Jensen is a director with PwC in Washington. Hank Hillstead is a tax associate at PwC in Washington. For more information about this column, contact firstname.lastname@example.org.