What You Need To Know About The Taxation Of Streaming Services
When it comes time to relax with your favorite show, where do you go to find it? Over the last decade, more and more people have made the choice to look online and utilize streaming services like Netflix and Hulu instead of depending on traditional cable or satellite TV.
This trend is in line with digital transitions in many industries, and like those other industries, it presents new tax challenges for regulatory agencies and streaming companies alike.
In this article, we'll share the brief history of streaming taxes, where we are today and our predictions for the future.
As the most famous of the streaming services, Netflix paved the way for those that followed in its wake. First offering its "Watch Now" video on demand service in 2007, Netflix has more than 208 million paying subscribers, with 74.4 million of those in the U.S. and Canada.
Hulu followed soon after and was launched in 2008, with other streaming services like Disney+, HBO Max and Peacock, appearing in the market over the last decade.
With these services becoming more widely available, and televisions now coming with built in "smart" functionality, many households have chosen to cut the cable cord altogether. Since 2015, the percentage of American's who say they "watch television via cable or satellite" has dropped from 76% to 56% in 2021, according to a new Pew Research Center survey of U.S. adults.
As a result of the popularity of these services, and declining revenue from the taxation of traditional cable television, around half of U.S. states have implemented legislation that adds a tax to streaming services. More states are in the process of introducing similar legislation.
The taxation of the digital economy has grown over the last several years and hold out states are starting to jump on the bandwagon. Maryland is one such example. They recently enacted taxation on a number of digital products and services.
Other hold out states include Georgia, which introduced digital taxation legislation during this year's legislative session, Missouri and North Dakota.
Cities in the U.S. are also taking steps to secure their own cut of the streaming-related profits by suing streaming services for lost revenue due to the decline in cable users.
As streaming platforms and other digital services continue to gain popularity, we expect that hold out states, which are missing out on potential tax revenue, will make the transition to taxing these products relatively soon.
Within just the last few years, we've seen huge change in this area and we expect the next few years to be just as tumultuous.
Do you have questions regarding the taxation of streaming services, or any other state tax situations? If so, please contact us today. We're happy to clarify any multi-state tax issues you're trying to navigate.
Focus on Tennessee
This month, we travel east to Tennessee, the Volunteer State. It is the 36th largest state by area and the 16th most populous state. Nashville is home to the Grand Old Opry. Memphis, in the far southwest portion of the state, is home to Elvis Presley’s Graceland and the blues clubs of Beale Street. Sun Records resides in Memphis, which is where Elvis Presley, Johnny Cash, Roy Orbison, Carl Perkins, Jerry Lee Lewis and Charlie Rick began their recording careers.
Tennessee is home to the Great Smoky Mountains National Park, located in the eastern part of the state. It is the most visited national park in the country. Furthermore, the state is considered to be the most biologically diverse state without a coastline, boasting seven of the eight most ecologically rich rivers in North America. It has more than 325 species of fish, ranking the state first among all states in freshwater fish diversity. The state also has a diverse population of salamanders.
An Update On Cannabis Taxation In California
As with any new or evolving industry, the taxation of cannabis in California has undergone rapid change over the last five years. California became the first state to legalize medical marijuana in 1996 and on November 8, 2016, the state's voters chose to legalize recreational use of marijuana. Since then, the taxation of cannabis within the state has been a hot button issue.
Beyond adjusting tax rates, recent changes in the cannabis industry have simplified the regulatory and licensing oversight of the market and made it more readily accessible to medical marijuana patients who found the plant too expensive to buy after recreational cannabis was legalized.
In California, cannabis sales are subject to sales and use taxes, a 15% excise tax on retail purchases of cannabis and cannabis products and local cannabis business tax, which depends on the jurisdiction. Additional cannabis taxes are levied on harvested marijuana as it enters the commercial market with rates dependent on if the harvest is flowers, leaves or a fresh plant.
For businesses, this means that cannabis sales are very complex tax-wise and ensuring compliance is essential to continuing success, especially in such a highly regulated industry.
Earlier this year, the state created the Department of Cannabis Control to simplify oversight and licensing of cannabis businesses, reducing regulatory-related burdens and providing one resource for business and taxation support for cannabis businesses.
That said, we heavily recommend that businesses that are new to this industry to consult with professionals like Miles Consulting Group to assist with navigating these tax waters.
For consumers, California's cannabis taxes means that every purchase of cannabis or cannabis-related products of a $100 includes another $15+ of tax, depending on the location. In Los Angeles, for example, a $100 purchase of cannabis totals $138.52 after tax, as calculated and shared by Leafy. The amount of tax added onto each sale has proved to be as harmful and it is beneficial for the state. While the tax revenue has been beneficial for the state's budget, a thriving marijuana black market continues to exist as recreational users look to dodge the heavy taxation on legal purchases.
This taxation also made it difficult for low-income medical users of the plant to acquire it. Under the legalization legislation, marijuana was taxed at the same rate, regardless of whether it was sold or if it was donated to a non-profit for distribution to those who needed it most. As a result, these programs suffered, but the passage of California Senate Bill 34 amended this tax issue and created a legal pathway for cannabis companies to participate in these programs without needing to apply a portion or all of the taxation levied on sales.
California has certainly blazed a trail in regards to legal recreational cannabis and its taxation, but other states are also walking this path as well.
As of September 2021, 18 states have fully legalized cannabis, with another 13 states having decriminalized its use. More states have legalized medical marijuana, with only five states banning its use in any form for both medical and recreational purposes.
States that have legalized marijuana have either already levied an excise tax or are in the process of doing so. Rates depend on the state, with some utilizing a system that places a certain percentage of tax per ounce, while others tax based on the amount of THC in the products or levy different rates based on the type of product.
As a result, consumers and businesses will have very different experiences with cannabis taxes based on the location of their business or where they are making their purchase. The different systems make direct comparison difficult, but Washington, with an excise tax rate of 37%, is generally considered the most expensive state to buy recreational cannabis in.
As we previously stated, companies doing business in this industry should be especially cautious when it comes to collecting and remitting taxes on their products. If you have questions, Miles Consulting Group can help.
Do you have questions regarding the taxation of cannabis, or any other state tax situations? If so, please contact us today. We're happy to clarify any multi-state tax issues you're trying to navigate.
California Competes Tax Credit – An Update
Tax Incentives in General
Statutory tax credits are helpful to businesses looking to expand their operations within a state. As is often headlined in mainstream media, states compete with one another to entice companies to build plants, new headquarters operations, etc. within their state. And companies (particularly large ones) are happy to be courted for these often lucrative incentives which can include income tax credits, sales tax rebates, alternative financing, property tax incentives and infrastructure improvements – to name a few.
But over the years, state tax incentive programs have been criticized by many as “corporate giveaways” because companies often receive the tax breaks but don’t live up to the agreed upon investment (generally headcount). When companies fail to meet their milestones, it is often difficult for states to claw that money back and states are left to decide how to deal with the shortfall.
Are Remote Workers A Tax Liability? It Depends.
Are your employees still working remotely? When the pandemic first hit, many businesses were forced to transition to a remote working model for safety reasons.
In the time since, some companies have returned to the office, while others have adopted a hybrid model or continued with remote working due to ongoing concerns regarding COVID-19 variants.
Regardless of your specific situation, one thing that every company should be paying close attention to is how these workers can impact tax obligations. In this article, we'll share updates to the situation and how they might impact your business.
In previous posts, we've delved into the history of this situation. The short version of the story is that ordinarily, remote workers that live in a different state than they work can create "nexus," which is the amount of contact from a company needed in order to be obligated to collect sales tax in a state, or to be subject to income tax or gross receipts type taxes.
Due to the pandemic, many states chose not to assert nexus on companies whose employees were working remotely specifically due to the pandemic, while others simply waived these nexus obligations for a period of time. Other states did not offer guidance at all.
Now, fast forward to today. Similar to other pandemic-era tax waivers or forgiveness programs, these remote working tax programs may soon be ending (or have already ended) and businesses will be required to deal with the full brunt of the tax liabilities created by their remote employees.
Starting July 1, Pennsylvania resumed enforcement of its pre-pandemic telework tax policy, which includes corporate income tax, withholding tax and sales and use tax.
New Jersey made headlines when its Division of Taxation released guidance stating that the temporary rules put in place, that waived certain tax obligations created by remote workers, will be lifted starting on Oct. 1. This guidance applies to sales tax and business tax purposes, as well as employer income-tax withholdings.
A long-standing situation in New England also saw an update recently. In June, the U.S. Supreme Court denied a motion for leave from New Jersey, which challenged controversial regulations from Massachusetts. These regulations required that nonresident employees who worked in the state prior to its state of emergency would have to source their wages to Massachusetts, "in the same proportion as immediately before the pandemic, regardless of the location from which these employees telecommuted to Massachusetts."
While many workers are hoping to stay remote, a recent survey by Bloomberg Tax & Accounting shows that under "normal" circumstances, a majority of states would find "a minimal number" of remote workers who do not conduct solicitation activities would be enough to create nexus. Mississippi was the only state to respond that a remote employee would not create nexus under any of the circumstances included in the survey.
In the long run, the pandemic has undoubtedly pushed many businesses towards a remote or hybrid work model, but there will be tax ramifications to be dealt with. To stay ahead of these obligations and ensure compliance, companies must be proactive about their tax liabilities. That's where Miles Consulting can help.
To stay on top of your tax obligations due to remote workers, or any other state tax situations, please contact us today. We're happy to clarify any multi-state tax issues you're trying to navigate.
Focus on Kansas
This month brings us to the center of the country, the Great Plains state of Kansas. Kansas is a Midwestern state that epitomizes the U.S. Heartland with its Great Plains setting of rolling wheat fields. For thousands of years, what is now Kansas was home to numerous and diverse Native American tribes. Tribes in the eastern part of the state generally lived in villages along the river valleys. Tribes in the western part of the state were semi-nomadic and hunted large herds of bison.
The western two thirds of the state, lying in the great central plain of the United States, has a generally flat or undulating surface, while the eastern third has many hills and forests. The land gradually rises from east to west. It is a common misconception that Kansas is the flattest state in the nation. In fact, Kansas has a maximum topographic relief of 3,360 ft, making it the 23rd flattest U.S. state.
Is Wayfair Simplification On The Horizon?
If you're a business owner, accountant or involved in the tax world in any way, you've undoubtedly been made aware of the Wayfair decision.
In short, that decision, which said that South Dakota's economic nexus law was constitutional and opened the door for other states to do the same, effectively made it easier for companies to create nexus in a state for sales tax purposes, thus creating a collecting and filing responsibility.
Over three years later and every single state that has a general sales tax has implemented some form of Wayfair-related legislation, whether economic nexus or marketplace facilitation. However, because each state has the freedom to do so independently, tax rates and the triggers for these Wayfair laws vary wildly. For businesses, this lack of cohesion has created a tax burden that, for some, is nearly unbearable.
As previously mentioned, much of the complexity regarding Wayfair laws comes from the lack of uniformity on a national scale. However, additional complexity can be found in the application of this legislation, with many states also utilizing different components for measurement (gross sales vs. taxable sales) for Wayfair thresholds, on top of thresholds that differ state to state.
The other problem comes from the catch-22 that Wayfair legislation has created for online retailers. Companies need a certain amount of sales to keep making a profit, but if they do too much business in certain states, they may trigger economic nexus, resulting in additional money spent to stay tax compliant. To stay ahead of these costs, retailers need to do more business, but that may result in additional tax liabilities.
Previously innocuous things, like Black Friday, surges in online shopping and tax holidays, have suddenly become hidden traps for online retailers. A sudden surge in business can get these retailers caught in the sticky web of economic nexus and leave them unprepared for the tax consequences that follow.
The final hold-out state enacted Wayfair-related legislation earlier this year. As a result, remote retailers face economic nexus, marketplace facilitation or both in 46 states, plus Washington D.C. and Puerto Rico.
Ever since the Wayfair decision, various entities have proposed simplification solutions but there are more calls now than ever thanks to the pervasiveness of Wayfair laws.
The Streamlined Sales Tax Project and the resulting Streamlined Sales and Use Tax Agreement are two such efforts and actually pre-date the Wayfair decision. However, while the agreement proved popular in certain circles, only about half of states have adopted it since its implementation, limiting its effectiveness in regards to the Wayfair situation.
Companies like Etsy, which recently asked sellers on its platform to join it in advocating for a federal solution, have also spoken out regarding the increased burden Wayfair creation.
Over the last three years, some states, including Alabama, Louisiana and Texas have taken steps to simplify tax remittance for remote sellers. Several have also adjusted economic nexus thresholds to provide additional safe harbor for smaller business more heavily impacted by Wayfair legislation. (That said, other states have widened the net instead.)
Legislative bodies have also reviewed Wayfair legislation, with many acknowledging the complication these laws create but stopping short of proposing a specific solution.
However, despite all the discussion, there remains no overarching solution to the complexity of Wayfair legislation as of now. As states continue to feel the effects of the pandemic and look to the taxation of online retail as a source of income, it's unlikely many will want to make concessions on their own Wayfair-related legislation.
While these conversations continue, retailers will have to deal with the ramifications. To stay tax compliant, businesses need to stay proactive about their tax liabilities and seek professional assistance if the burden becomes too great to bear on their own.
We answer questions around this topic daily - so if you call us to ask questions, you're in good company!
If you have questions regarding your online sales tax liabilities, or any other state-related tax questions, please contact us today. We're happy to clarify any multi-state tax issues you're trying to navigate.
Avoiding Common Exemption Certificate Mistakes
If you’re manufacturer, wholesaler, or a reseller, you know that collecting resale and tax exemption certificates is par for the course. Like most things tax related though, it’s often not as simple as collecting a document and calling it a day. Rules for collecting certificates can vary based on the state, products involved, business relationships and a variety of other factors. If that wasn’t hard enough, the rules themselves are prone to frequent regulatory changes.
One of the most common mistakes that businesses make when collecting exemption certificates is not collecting the right resale or tax exemption form. To know which form must be collected, a business must be familiar with a variety of rules pertaining to sales tax nexus and compliance. For instance, if you’re a business based in Rhode Island shipping goods for resale to your customer across state lines into Massachusetts, your customer must provide you with a valid Massachusetts Resale Certificate in order to substantiate that the sale is indeed tax exempt. This is due to the nature that sales tax rules for transactions are typically based on the ship-to-state. If your customer were to provide you with a Rhode Island Resale Certificate, and you accept this certificate without charging sales tax and forget to remediate this, you may find your business taking on an expensive liability during your next sales tax audit.
What To Know About Intercompany Service Receipts In Washington
Washington state is known for its evergreen forests, beautiful mountains and for being the home of Starbucks. That said, for remote retailers, it should also be known as a state with several unique tax situations, one of which is its treatment of intercompany service receipts.
In general, the Washington Department of Revenue (DOR) takes a fairly aggressive stance in regards to the taxation of remote companies providing services to customers within the state.
However, companies have several avenues that could provide potential relief for these tax burdens.
As previously mentioned, Washington state is aggressive in its approach to the taxation of remote companies. In regards to economic nexus, Washington was among the first to enact it, with a version of it being implemented on Oct. 1, 2018. The state also enforces economic nexus for its business and occupation (B&O) tax on gross receipts.
Washington state is also proactive when it comes to the taxation of technology products, which makes sense given the number of technology companies that have headquarters within the state, including giants such as Microsoft, Amazon and Nintendo of America. In short, all digital products are taxable. Prewritten computer software that is electronically downloaded is taxable. However, custom computer software that is electronically downloaded is exempt. Lastly, Software as a Service (SaaS) is also taxable.
When it comes to intercompany services receipts, the location of the main beneficiary of the services is a primary factor in determining the sourcing of those receipts, as opposed to where the services are performed. According to ReedSmith, businesses that perform support or management services, such as human resources or accounting, for an affiliate that is a wholesaler or retailer of tangible personal property often get caught by Washington's nexus web.
Specifically, "Both [companies] are based outside Washington and may have little or no property or payroll in the state. [The affiliate and operating company] makes sales nationwide and pays B&O tax, while [the service provider] has no filing history in Washington prior to being audited by the [DOR]. On audit, the Department sources a portion of [the service provider's] intercompany receipts from [the affiliate] to Washington, resulting in B&O tax liability for [the service provider]."
According the ReedSmith, a recent Washington state Court of Appeals decision on LendingTree, LLC v. Department of Revenue provides guidance in regards to these situations. In the opinion, the court determined, "the benefit of LendingTree's services were received at the location where its customers were physically located, not at the location of its customers' market (the borrower location)."
Depending on how the sourcing of receipts is determined, the B&O tax liabilities of the provided services can be mitigated, providing relief to companies providing services and with nexus in Washington state.
If you have questions regarding your online sales tax liabilities in Washington, or any other state, please contact us today. We're happy to clarify any multi-state tax issues you're trying to navigate.
Focus on West Virginia
Known for its mountainous landscape and rolling hills, this month we travel north to West Virginia. The state has a rich history and is embedded in the Appalachian Mountains.
West Virginia is known for a wide range of outdoor recreational activities, such as skiing, whitewater rafting, fishing, hiking, backpacking, mountain biking and hunting. The state offers many golf courses as well.
It is also one of the most densely Karstic areas in the world, making it a choice area for recreational caving and scientific research. Karstic topography is a landscape formed from the dissolution of soluble rocks such as limestone, dolomite, and gypsum. It is characterized by underground drainage systems with sinkholes and caves. These underground hydrology systems contribute to much of the state’s cool trout waters.
