The purpose of this white paper is to provide an overview of the state sales and use tax issues facing large and small companies today and to provide a road map for companies to see their way through the complexity.

1. Where Does a Sale Take Place in Cyberspace?
Staying on Top of the Changing Rules

2. Introduction
State sales and use tax laws have long been an area of ongoing complexity and
change, but emerging technologies have increased that complexity tenfold. It
wasn’t that long ago when terms like “cloud computing” sounded more like
science fiction. Today, they are well understood by most Americans. As more
technology migrates to the cloud and as Software as a Service (SaaS) becomes
a common means of software distribution, products are being digitized and
downloaded instead of purchased on-site at the store. States are hungry for
revenue, but don’t know quite how to proceed since their laws often define
taxable goods as tangible items. States are taking very different approaches to
taxing emerging technologies, making it increasingly difficult for companies to
move forward with confidence. If you are feeling lost in the transition, you are
not alone.
The purpose of this white paper is to provide an overview of the state sales and
use tax issues facing large and small companies today and to provide a road map
for companies to see their way through the complexity.
A Changing Landscape
State sales and use laws have always had
their unique quirks. Not long ago (it has
since changed), North Carolina’s tax code
defined “food” as any item that contained
flour and exempted those items from tax.
As a result, you could purchase a Snickers
bar and not pay state sales tax because
a Snickers®
bar contained flour. If you
wanted a Mars®
bar, however, you’d better
be prepared to pony up because Mars®
bars did not contain flour. So you had two
pieces of candy from the same supermarket
shelf being treated very differently due to a
technical definition.
Similar issues are arising with emerging
technology today. Take Microsoft®
Office,
for example. Just a few years ago, if you
wanted to purchase a copy of Microsoft®
Office, you would walk into a store like
Best Buy®
and pick up a DVD. That disc was
taxable because the disc itself was tangible.
Today, you can go to Microsoft.com
and subscribe to Microsoft®
Office 365.
You receive the same Office functionality
only the software is housed on Microsoft®
servers, not on your computer. The method
of delivery is what’s making one version
taxable and one not taxable, depending on
where you live.
Today, we are probably more likely to
download our music from iTunes®
instead
of purchasing CDs in a record store. Or we
could access a music streaming service like
Spotify®
that allows subscribers to play
music on any device for a subscription fee.
The change in the delivery of products and
services has meant changes to the ways
states tax these items.

3. Increased Regulatory
Complexity
Predictably, states are taking very
different approaches in how they treat
digital or cloud-based products, making it
exceedingly difficult for companies to stay
on top of the multitude of regulations. For
example, Pennsylvania, Texas and Utah
have started to provide guidance on the
taxability of SaaS products, while some
states such as Colorado and Virginia have
decided not to tax SaaS products, which
could encourage cloud service providers to
open offices and create jobs in their states.
Some states have begun moving forward on
a case-by-case basis, while others haven’t
even begun grappling with this thorny issue.
One thing is clear: as cloud computing
continues to evolve, and as more states seek
fresh revenue sources, we can anticipate a
great deal more action and change in this
space. The challenge is for companies to
stay on top of the evolving regulations.
Many states are starting to change their
definitions of a taxable product. In the
past, states would tax tangible items. If
it could be held and touched, it could be
taxed. Now we’re seeing states change
the wording of tax laws, introducing a
great deal of ambiguity by saying that
personal property is anything that can be
perceived by the senses of the purchaser.
In addition, they are changing the definition
of “situsing” rules. Put another way, they
are beginning to redefine where a sale is
sourced for tax purposes. For transactions
involving sales of digital content and cloud
services, the proper application of situsing
rules is largely dependent upon how these
product offerings are characterized in
a given state. The threshold issue is to
determine how the product or service is
characterized for sales and use tax purposes
(e.g., tangible personal property, service,
etc.). Once that determination is made,
each state’s situsing rules may be applied.
However, states have proven inconsistent
in characterizing the sale of emerging
technologies as tangible personal
property or services for sales and use
tax purposes. These types of state
inconsistencies are the rule, rather than
the exception. Nevertheless, once the
characterization of a product and its
taxability is determined, an understanding
of a state’s sourcing rules is essential.
Who Gets the Tax?
When a company with a cloud in one
state sells to a customer in another, which
state gets the tax? Is it the state where
the user buys the product? Or the state
where the server is located? The answer, as
you might have guessed, is “it depends.”
Some states are using the billing address
of who purchased the product. Others
have decided to source the tax to the
location of the server. Still others take a
multiple points of use approach. When
companies have multiple locations, things
tend to get complicated quickly. Questions
that need to be answered include:
ll Which jurisdiction gets the tax
when software is downloaded from
a server in one state and used by a
customer in another?
ll Where did the property change hands?
ll Where did the property originate from?
ll Who shifts the property to someone else?
ll Where is the address that gets the bill?
A Ray of Hope
On the bright side, there’s a growing
movement toward simplifying the state
sales and use tax code to create a common,
universal definition of how to tax these
emerging technology products. The
Streamlined Sales Tax Governing Board,
which consists of 24 states coming together
to create a uniform sales tax law, has
attempted to lead the charge in establishing
clear and predictable rules around situsing.
Unfortunately, it appears that these issues
will not be resolved in the near future.
Based on the recent introduction of federal
legislation intended to mandate collection
on remote sellers (the Marketplace Fairness
Act or MFA), the short-term efforts of the
Streamlined Sales Tax Governing Board will
be focused on the implementation issues
associated with federal legislation, rather
than on these more substantive issues.
That leaves businesses in a challenging
position, because they are the most at
risk of being audited. Unfortunately, the
burden is on companies to stay on top of
the murky state tax laws themselves, but
many organizations are simply not staffed
appropriately to do that effectively.

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Wolters Kluwer is Here to Help
State sales and use tax is likely going to be a difficult issue for a long time. The important thing is for you to realize that you are not alone.
As long as you understand your business, where you’re going, and what you’re trying to accomplish, sales and use tax shouldn’t be scary.
In addition, remember that there are resources available to help you learn what you need to know and that Wolters Kluwer is there
for you every step of the way. With over 100 years of expertise, we can help you simplify complexity, stay current, save time and act
with confidence.
Would You Like to Know More?
We’d like to hear from you! To make a specific inquiry or for
more information on our sales and use tax solutions, please
complete the Contact Us Form and a representative will get in
touch with you.
Or, contact us via phone at 866-513-2677.
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So What’s a Company to Do?
Smaller businesses have it the hardest given their staffing challenges. Generally, they only have one or two people on their
accounting staff, and if they have an online store, they could be doing business in 30–40 states. Those two people have a business
to run, and it’s difficult to find the time and resources to stay current with evolving regulations and across all states.
Below is a checklist to help companies of all sizes move forward and truly master the states sales and use tax requirements:
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SalesTax.com
866-513-CORP (866-513-2677)
1. Understand your business.
First, take a look at your organization’s
geographic footprint to get a solid
understanding of your business.
Where do you have employees?
Where do you have inventory?
Then take a look at your sales channel.
Are you only selling in brick and mortar
locations? If so, are you going to be
adding any over the coming years? Is
your business going multi-channel? Are
you expanding from brick and mortar
to becoming an online retailer? What
about the products and services you
offer? Are you adding anything new to
the mix? Once you understand your
business and where it is going, there’s
no reason to be afraid of sales tax.
2. Take advantage of technology.
Technology can help you stay on top of all
sales and use tax law changes in every state
in which you do business. Companies like
Wolters Kluwer have built their businesses
around keeping companies informed
and up-to-date on how the various state
tax laws work nationwide. Solutions like
Sales Tax Office, IntelliConnect®
and
RADAR make sure that people have the
latest information and enable them to
stay compliant in an efficient manner.
When companies like Wolters Kluwer do
your tax research for you and deliver that
research through innovative solutions,
they’re giving you back time, enabling
your staff to get back to running the
business. They’re taking a wealth of
information and putting it in your
hands through solutions that are easily
integrated into your environment.
3. Consider professional services.
For some projects, it can make sense to
bring in professional help. Wolters Kluwer
has an accomplished professional services
group consisting of CPAs whose sole
purpose is to help companies implement
best practices. A professional services team
can help you determine your business
footprint, where you may have exposure,
and identify places where you should be
collecting taxes. They can also help you
install and configure software so that
you are fully supported, thus minimizing
impact to your daily operations.
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