Popularly called the iTunes tax, an unpopular sales tax on digital downloads is required to be paid currently in 27 states and the District of Columbia. Add this to the Streamlined Sales Tax Project (SST) and the ‘Internet Tax’ that Megan and I blogged about last week and we’re all about to get hit with a lot more tax than we’re expecting.
Currently, Alabama, Arizona, Colorado, Connecticut, District of Columbia, Hawaii, Idaho, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maine, Michigan, Minnesota, Nebraska, New Jersey, New Mexico, New York, Ohio, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Washington, West Virginia, Wisconsin, and the District of Columbia impose such taxes, according to research by CNET News.com, Electronic Arts, and the California State Board of Equalization, which sets the state’s tax rules. There is even confusion among these authorities as to what exactly is included in the ‘digital download’ definition.
Currently, we use the “origin” basis for sales. In other words, you pay tax based on where the seller has nexus, not where the buyer is located. If you have a digital product that you sell over the Internet, you have a lot of freedom on where you can set nexus. Oregon (with no sales tax) would look pretty compelling, but don’t forget they have a pretty steep income tax. So, you’re going to have to weigh the best options for where to establish nexus. And if SST prevails over the Internet Tax, we’ll have destination-based nexus and it’ll all be moot.
Keep your tax plans flexible. We’re in for a bumpy ride.