In a minute, I’m going to cover what states are doing with sales tax for digital downloads and how giving away a manual or coaching materials could make your services subject to sales tax. But first, let’s go over nexus and sales tax and how this might effect you more than you might think.
We’ve been talking about Nexus this whole week at USTaxAid. There isn’t just one clear-cut definition of what it means to have nexus in a particular state and so that’s created a lot of different rules for each state.
Remember that there are two types of nexus: sales tax nexus and income tax nexus. Sales tax nexus is easier for a state to prove than income tax nexus. And with the new rules, some of which we’re talking about this week, there is a lot of concern that businesses may be missing out on collecting sales tax.
State sales tax nexus means you must pay sales tax. If you don’t collect in on sales you make, too bad, you still must pay it as if you did collect it.
Once sales tax nexus draws you into a state, you must then follow that state’s rules for sales tax. This is where it gets tricky. Just because you know what is, and isn’t, subject to sales tax in your home state, it doesn’t mean that you know what is subject to sales tax in other states.
For example: In Texas, shipping and handling is subject to sales tax. In Illinois, candy is subject to sales tax, unless it can be considered food according to their overly complicated rules. (Answer: Don’t sell candy to people who live in Illinois, or if you do, get a CPA to wade through the rules for you first.)
There is another tax you might have an issue with, and not even know it. The tax is called a digital download tax. This means that you need to collect sales tax on any ebook, home study course, audio file, or video file that you sell, if you have sales tax nexus in these states and you sell to someone who lives in these states. And, if you give away a product, you still may owe sales tax based on the fair market value! This is something you want to check with your qualified tax advisor.
And there’s even more to be concerned about here. Some states such as Texas say that if you give away some kind of written material (either a physical copy or digital) or audio file to your clients, it could mean that the service you rendered is now subject to sales tax as well.
Wow! Let me say that again. Let’s say that my tax company, US Tax Aid Services, has Texas sales tax nexus. When you are a client of my firm, you get the coaching courses for free. But, the coaching courses have a value and that value is at least 5% of the total value of what you’re getting when you’re one of my clients. So, if I have Texas sales tax nexus (which I don’t) and I have a Texas client, I would be required to charge TX sales tax on the tax services we provide. Can you see why I want to avoid Texas nexus at all costs? How about you? This is obviously a complicated part of the law, but the thing to remember is:
The Digital Downloads Tax can mean that your services become subject to sales tax too!
If you have nexus in any of these states, check into the state laws immediately. They all have partial or full sales tax on digital downloads.
District of Columbia (in some cases)
Connecticut (in some cases)
You may have noticed that the number of states on the digital download list has gone up from last time I posted it. It used to be 18. We now have 25 to watch out for!
And, there is one more warning, some of these states impose a tax on FREE digital downloads.
Here are 3 steps to head-off potential sales tax nexus problems:
- Determine where you have sales tax and income tax nexus.
- Review the laws in each state.
- Set up to collect sales tax now.