Whether digital products are subject to sales tax sometimes depends on who you ask. Either way, states need to address sales tax policies on digital products as soon as possible.
The following case, which focuses on decisions made in Mississippi and their Revenue Department in particular, illustrates why states need to clarify tax policies related to digital products. Most states tax at least some digital products, but as the Multistate Tax Commission (MTC) notes, “they’ve taken very different approaches.” To underline this point, he quotes “an important article on the subject”: “How do states define, tax and exempt digital goods and services from taxation? In all directions. The end.”
The MTC therefore strives to identify “potential best practices and areas for increased uniformity” with regard to the taxation of sales of digital products. It will take time. The first step will be the creation of an outline for a white paper on the issue, which the MTC will present at its meeting in November 2021.
Focus on the Mississippi
The Mississippi Department of Revenue maintains that sales of digital photographs are generally taxable. In 2016, the department held a wedding photographer liable for $ 44,533 in unpaid sales tax, plus penalties and interest, for the period January 1, 2011 through January 31, 2016. The Tax Appeal Board has by the following confirmed the assessment of the sales tax, but on appeal, the Supreme Court of Mississippi ruled in favor of the photographer.
So, are digital photographs taxable in Mississippi or not? As described in this notice of appeal (tip of the hat to Eversheds-Sutherland), the photographer claims that he primarily sells wedding photography services, not goods or tangible personal property, and that the photography services are “Expressly absent from the list of taxable services established in §27-65-23 of the Mississippi Code. Thus, they had not registered for a sales tax permit or had not charged sales tax to their customers.
The Mississippi Department of Revenue maintains that the photographer “engaged in the sale of tangible personal property, which is taxable under section 27-65-17 of the Mississippi Code.” In addition, the photographer failed to prove that the photograph is not a taxable service or that it should not be subject to tax under 35.IV.4.04, which reads: “Photographers and videographers are taxed at the regular retail sales tax rate on retail sales to consumers of photographs, images, videos, diskettes and other tangible personal property.
It sounds like a reasonable argument, and the Tax Appeal Board agreed it was. Yet the Mississippi Supreme Court disagreed. The court made several interesting remarks:
1. The list of taxable retail sales of a photographer in 35.IV.4.04 does not include “specified digital products”.
2. Although Mississippi laws and regulations have been updated and changed several times, photography services have not been added to the list of taxable services in the state.
3. When Mississippi moved to tax “specified digital goods,” it did not include digital photography or images produced as a result of digital photography in the law.
It is true that digital photographs are not named in the state definition of specified digital products (§27-65-26), although “electronically transferred digital audiovisual works, digital audio works and books digital “are:
- “Digital audiovisual works” means a series of related images which, when presented in succession, give an impression of movement, as well as accompanying sounds, where appropriate.
- “Digital audio works” means works which result from the fixation of a series of musical sounds, spoken or otherwise, including ringing tones. “Ring Tones” means digitized sound files that are downloaded to a device and that can be used to alert the customer about a communication.
- “Digital books” means works which are generally recognized in the ordinary and usual sense as “books”.
The Mississippi Department of Revenue is appealing the Supreme Court ruling, and it will be interesting to see what happens. According to Scott Peterson, vice president of government relations at Avalara, “generally the onus of proving that a purchase or sale is exempt falls on the person requesting the exemption and the onus of proving that something is taxable is on the person requesting the exemption. the State ”.
In the meantime, the ministry is working on amending the Photographers and Film Developers Regulation to clarify that “photographers and videographers are taxable at the normal rate of sales tax on retail sales to consumers of photographs, images, etc. videos, records and other tangible items. specified personal property or digital products ”(italicized text is new).
The amended settlement, as proposed, can be viewed here (another tip of the hat to Eversheds-Sutherland). If passed, the change would take effect on October 1, 2021.