September 2, 2005, 12:00 AM

Internet sales tax proponents deal with digital products, delivery issues

As 18 states begin operating next month under the Streamlined Sales and Use Tax Agreement, they still need to work out issues regarding how to tax deliveries and digital products and services, a state tax official says.

 

As 18 states begin operating next month under the Streamlined Sales and Use Tax Agreement, or SST, they still need to work out issues regarding how to tax deliveries and digital products and services, Scott Peterson, a South Dakota tax official who has co-chaired the Streamlined Sales Tax Project, tells Internet Retailer.

Digital music and other digital products and services still present a tough issue to resolve, Peterson says, because the digital market itself keeps evolving. “It’s a problem we‘ve been working on for years, because digital products keep changing, and how do you define a moving target?” he says.

The challenge lies in the fact that digital music, for example, can be considered either a product or a service-and the difference could determine whether or not it’s taxed, Peterson says. If digital music is downloaded for permanent ownership under Apple Computer Inc.’s iTunes model, states may be more likely to define it as a product, but if it’s rented under the subscription model offered by Napster and others, states may be more likely to consider it a service, he adds.

Some states like South Dakota are more inclined to tax both products and services, while others tax only products, Peterson says. But the goal of the SST is to have a common taxing system for Internet sales to make it easier for retailers to comply with a multi-state system of collecting sales tax, he says.

Delivery charges present less of a challenge, but still one that needs to be worked out, Peterson says. The issue mainly concerns retailers who object to the additional requirement of adding details to customer invoices. Under the SST, retailers are only expected to collect sales tax on delivery fees charged against taxable items, but under current SST terms retailers are expected to detail in invoices the amount of sales tax collected for each item. “Retailers don’t want to do that since the SST project is supposed to be about simplification,” Peterson says.

A compromise will probably result in letting retailers avoid detailing tax allocation in invoices, as long as they show how tax was allocated in their accounting records, Peterson says. “We’ll work that out, but we’ll still have to amend the agreement,” he says.

States that participate in the SST have agreed to cooperate with one another in the collection of sales tax under common terms on cross-border Internet transactions.

 

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