Tax legislation can be difficult to understand. It is not black and white; individuals sometimes interpret the same law in different ways. While most people can agree on the basics of sales tax laws , there are plenty of gray areas as the laws get more specific, especially if you are new to multistate sales tax compliance. In this blog article, we look at two areas of sales tax that often cause confusion: the taxation of digital products and services.
Digital Products & Sales Tax Confusion
SaaS and sales tax may at first seem like a straightforward area of taxation, but if you have kept up on our other blog articles linked here and here, you know it can get confusing quickly. In these cases, we recommend working with an expert multistate sales tax team like Miles Consulting Group.
For example, we worked with a client who developed a product on a platform they charge a subscription for, so it sounds like it would fit into a SaaS category. But given the way their customers interact with the product, it also could be categorized as an information service.
In this example, the client had multiple revenue streams, some classified as SaaS and others classified as information services. This created complications for the client because the same exact product may be taxed differently depending on how the state categorizes it. To help our clients with these issues, we look into what specifically the client provided to the customer and the tax law for each state they made sales in.
It is critical that a company correctly categorizes their products and services in each state they have liability in order to stay compliant and avoid a tax audit. To ensure compliance for all of our clients, we dig even deeper into statutes, ruling requests and regulations issued by a state’s department of revenue relating to SaaS and information services.
Companies can even approach a state to ask for a ruling on why products or services are categorized a specific way. States often do come back with a ruling in these cases (though it may not be binding), which can help clear up some of these gray areas of SaaS sales tax.
Gray Areas In Service Sales Taxations
In the past, while it certainly varied by state, very few services were taxed overall. As our economy has become strongly service-based, many states have incorporated more sales service tax laws. Just like with SaaS and digital products however, the laws regarding the taxation of services are not uniform across all states, so it is another example of sales tax legislation with some gray areas. Currently, no two states tax services in exactly the same way.
A few areas that states vary on include: definitions of services, treatment of services and sourcing of services.
Since states do vary greatly in their service sales tax legislation, we recommend thinking about the services being taxed in six categories to clear up the confusion.
- Services related to the sale of tangible personal property (TPP). This typically means services that improve or repair property such as car repair or carpentry services.
- Services to real property including landscaping and janitorial work.
- Services performed for companies and businesses including credit reporting agencies and telephone answering services.
- Personal services, which includes personal grooming or other types of self-improvement. Tanning salons and animal grooming services would fit under this category.
- Professional services including physicians, accountants and other licensed professionals.
- Amusement/recreation services. This includes admission to amusement parks and other types of entertainment.
In our recent blog article linked here, we go into more detail about services and sales tax. Check it out to begin to understand the complex gray areas of service sales taxation.
Still Have Sales Tax Clarification Questions?
As you can see, there are many gray areas in sales tax legislation. Even if you are compliant, it can be difficult to make the right decisions related to sales tax for your company. Working with an experienced team of state tax consultants like Miles Consulting Group is a great way to get clarity on any gray area decisions you may need to make. If you have questions about your state sales tax obligations, please contact us today. We’re happy to clarify any multistate tax issues you’re trying to navigate.
