How Will Sales Tax Continue to Affect Retailers as New Taxes Like the ‘Netflix Tax’ Become More Common?
This January, sales of streaming service subscriptions became subject to sales tax in Iowa, Washington, D.C., and the Canadian provinces of Québec and Saskatchewan. These areas join a growing list of jurisdictions now taxing the sale of content consumed through Amazon.com, HBO, Hulu, Netflix, Spotify and other streamed service providers — a tax we like to call the “Netflix Tax.” Fewer Americans tune into traditional television and cable these days, and it's harder to find a person who doesn't stream at least some shows or movies. For many people music access exists solely via apps, streaming services and the internet.
This shift has caught the attention of legislators and tax authorities, many of whom are eager to cash in on the trend — or rather, stop the bleeding. Digital goods and services are generally subject to tax when sold in their nondigital forms, so the change in consumer habits has a real impact on tax revenue. According to the U.S. Government Accountability Office, states missed out on as much as $13.4 billion in 2017 because they didn't make remote sellers collect tax.
That said, sales tax laws don't always keep up with shifting consumer habits and interests. Sales tax rates, rules and regulations change frequently, yet actual sales tax law is often slow to respond to major economic shifts. Sales of services generally outpace sales of goods these days, but the majority of services are still exempt in most states in the U.S. That's steadily changing. The more people rely on streaming services to satisfy their entertainment needs, the more these services will come under scrutiny for taxation.
The Future of Taxation for Retailers: How Far We Have Come Since South Dakota v. Wayfair
Since June 21, 2018, the state of sales tax has been in disarray because of the U.S. Supreme Court decision in South Dakota v. Wayfair, Inc. Now, economic activity in a state — i.e., economic nexus — can trigger a sales tax collection obligation. Economic nexus is based entirely on sales revenue, transaction volume, or a combination of both. Following the decision, several states started to tax remote sales through economic nexus, including the sale of digital goods and services via the “Netflix Tax.”
As of April 1, out-of-state businesses that sell into the massive state of California were required to start collecting and remitting sales or use tax under the state’s new sales tax economic nexus rule. Although state sales tax generally doesn't apply to streaming services in California, these services are subject to local taxes in some jurisdictions. It's worth noting that the California legislature amended the sales tax economic nexus rule, raising the threshold. The previous threshold of $100,000 in sales or 200 transactions in the state was increased to $500,000 with no transaction limit.
More than 30 states already or soon will require out-of-state businesses with a certain degree of economic activity in the state to collect and remit sales tax. As in California, these laws could trigger other tax responsibilities.
How Are Businesses Keeping Up?
Taxes on streaming service subscriptions are only the tip of the iceberg when it comes to the introduction of economic nexus laws over the past year. Though there's often resistance to expanding sales tax to previously exempt goods and services, including those that didn't exist when sales tax was first levied, it's gradually breaking down following the South Dakota v. Wayfair, Inc. decision.
Due to the new legislation, businesses across the U.S. are struggling to determine where they owe sales tax on remote sales and how much they owe. It's easier than ever to trigger nexus in multiple states, and it's harder than ever to keep track of evolving nexus laws. Businesses that are newly determined to have nexus within a state or local jurisdiction must then obtain the required business licenses and sales tax registrations for each new jurisdiction where they have the obligation to collect and remit sales tax. Since the process differs from state to state, contacting the state’s tax authority (known variously as the department of revenue, comptroller, tax commission, etc.) is a good place to start.
A word to the wise: businesses (especially ones that sells goods or services online) need to keep up with this rapidly changing legislation. It shows no sign of slowing down anytime soon.
Greg Chapman is the senior vice president of business development at Avalara, an automated tax software provider.