Evolution of Sales Tax Definition
Most states apply sales tax to sales of tangible personal property and selected services. Since sales tax inception in the 1930s, the definition has significantly evolved. It continues changing as technology propels us further into the digital world.
Importance of Understanding Tangible Personal Property
A recent decision by the Mississippi Supreme Court (Mississippi Department of Revenue v. EKB, Inc. No. 2021-SA-00441-SCT (Miss. 2022)) highlights the importance of understanding how tangible personal property is defined in a sales tax jurisdiction. The Court upheld relief granted by a lower court to a wedding photographer who was assessed over $65,000 for taking still digital photographs. These photographs were later transferred to customers by various tangible means, usually DVDs or flash drives.
Digital Products in Taxation
The court noted that the digital photographs were not tangible personal property. This was because while Mississippi statutes defining tangible personal property included some digital products, digital still photographs were not among the digital products specifically cited. This was cited in the statute (Miss. Code Ann. § 27-65-26 (3)). Furthermore, the court concluded that even though the photographs were transferred via tangible media, the tangible media was incidental to the services provided. Therefore, since photography services are not recognized as a taxable service in Mississippi (Miss Code. Ann. § 27-65-23). There was nothing about the transactions that were taxable.
Tax Savings through Understanding
In the final analysis, understanding how digital products factor into the definition of tangible personal property in your taxing jurisdiction can result in significant tax savings.
Taxation of Digital Products by State
The following states tax some or all digital products: Alabama, Arkansas, Arizona, Colorado, Connecticut, District of Columbia, Hawaii, Iowa, Idaho, Indiana, Kentucky, Louisiana, Maryland, Maine, Minnesota, Mississippi, North Carolina, Nebraska, New Jersey, New Mexico, Ohio, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Utah, Vermont, Washington, Wisconsin, and Wyoming.
States that exempt most digital products include California, Florida, Georgia, Illinois, Kansas, Massachusetts, Michigan, Missouri, North Dakota, Nevada, New York, Oklahoma, Virginia, and West Virginia.
Any questions should be directed to your state and local tax professional.