2020 sales tax changes: Midyear update

4: Tax on digital goods and services

States seem to be playing an endless game of chase these days, thanks to rapidly evolving technology and consumer habits. Just when states appear to catch up, boom, they get left in the dust.

For example, it took states decades to win the right to tax remote sales — long after the internet brought stores home in a way they never had before, not even with catalogs. After making huge gains with South Dakota v. Wayfair, Inc. and subsequent state economic nexus laws, states had to scramble again to close the loop allowing third-party marketplace sales to go untaxed. States that haven’t adopted economic nexus or marketplace facilitator laws are missing out on needed revenue, especially now that COVID-19 has more people shopping online than ever before.

More catch-up is needed: Despite today’s service economy, sales tax laws continue to center on tangible personal property and exempt most sales of services. Some states are working to change that, but it’s an uphill battle. Still, it may need to be done.

More and more activities are moving online, including conventions, trade shows, and school. Virtual haircuts are no longer the stuff of science fiction. Even happy hours and wine tasting are happening virtually these days.

Consumption of digital goods and services was on the rise before we were asked to stay home to help slow the spread of the coronavirus; stay-at-home orders merely amplified it. In recent months, virtual haircuts left science fiction for the real world. In-person conventions and trade shows moved online, as did school and work. Even happy hours and wine tasting are happening virtually these days.

In-person events raise tax revenue in a multitude of ways: Travelers pay taxes on transportation and lodgings taxes on their hotels and short-term rentals. They eat restaurant meals that are generally taxed at a higher rate than groceries. They pay sales tax when purchasing essentials and souvenirs. The more we communicate, learn, play, shop, and work online, the more compelling it becomes for states to tax these innovative solutions.

Communications taxes may also apply to these transactions. Steve Lacoff, general manager of Avalara for Communications, notes, “The line that separates the requirements for sales and use tax from more complex communications tax rates and regulations is a critical one. It can also seem incredibly blurry, especially for those who aren’t well versed in untangling the nuances of these scenarios.” Some sales are subject to sales tax only, some only to communications tax, and some to both.

Video conferencing and similar services could be particularly vulnerable to taxation in Ohio, Texas, and other states that held on to their internet access taxes for as long as possible. As of July 1, 2020, they’ll be forced to eliminate taxes on internet access fees under the Internet Tax Freedom Act. That will have an enormous impact on their budgets.

In short, a Wayfair for communications taxes is almost certainly on the horizon. Businesses should start preparing for a new reality.


Next steps

2020 sales tax changes: midyear update