Understanding Sales Tax for Tangible and Intangible Goods
Navigating sales tax can be complex due to varying definitions across jurisdictions. Terms like “manufacturer” and “groceries” can have different interpretations, leading to divergent sales tax regulations. A notable illustration of this complexity lies in the term “tangible.” Sales tax typically applies to sales of tangible personal property, yet determining what qualifies as tangible can be challenging.
What are Tangible Goods?
“Tangible” literally means “touchable.” An airplane, a house, or a tomato would be tangible. A plane ride or mortgage or cooking class would not. Tangible goods and intangible goods are distinguished by whether or not they can be touched.
Sounds simple, right? Not exactly. For example, a Kindle book is taxable in Indiana but not in Florida. Some states collect sales tax on digital goods and some don’t. Essentially, some states have decided that digital goods are tangible, even though you might not be able to pick them up. In fact, some estates have redefined “tangible” to mean things that can be discerned with the senses. A Kindle book is visible, but it can be seen or heard, and the device it is on can be touched.
Sometimes the difference between taxable and not is based on the item. For example, Kentucky charges sales tax for digital goods if they are “purchased for storage.” A streaming movie is therefore not taxable, but a movie downloaded to your computer is. Software is taxable — unless it’s custom software, in which case it is exempt from sales tax.
But some states charge tax on digital goods only if they are delivered in a tangible form. For example, if you buy software on a CD-ROM or flash drive, it will nearly always be taxable. If you download it, it often won’t be.
In some states, if you receive the software on a flash drive and then return the flash drive, it will not be taxable. If you keep the flash drive, the same software will be taxable.
Is it a Service?
In Texas, a website design is taxable, because web design is considered a service, and as a service it is taxable. It doesn’t matter whether the design is downloaded or furnished to the customer in a tangible form, because it is taxed as a service.
In Colorado, the service of web design is not taxable. However, if the files for the website are delivered on a disk or drive, they become a product and are taxable. If the designer uploads the files to a web host’s servers, the website is not taxable.
When you’re checking whether your product is taxable, you may need to determine whether the states where you have nexus think of your goods as products or as services. You may also need to consider whether you are bundling goods and services. If you bundle services or intangible goods together with tangible products, you might need to collect sales tax on all or part of that bundle.
Many of the examples of goods that may or may not be considered tangible are digital goods. This makes sense because many of the laws about sales tax predate digital goods. If you decide to teach a class on diamond mining, you are offering an intangible product. If you write what you know into a book and sell it, you are offering a tangible product. But if you upload a video course on the subject and sell people a link to download the video course…well, that’s a gray area. Some states have gone in one direction and some in another.
As more types of digital goods become available and popular, laws will have to change to keep up. Chances are good that economic and political realities will affect the decisions legislators make in various states just as much as whether a product can literally be touched or not.
Sales Tax DataLINK can help
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