Gov. Roy Cooper of North Carolina signed a bill into law applying the state sales tax to a wider array of online services and digital property.
S.B. 523 “broadens the scope of sales tax on digital property by eliminating the requirement under the state’s tax code that a digital item must have a taxable, tangible corollary in order to be taxable,” states the Legislative Analysis Division of the North Carolina General Assembly in a July 8 report on the bill signed by the governor on July 26.
Examples of goods with a “tangible correllary” include audio files, which are also sold on compact disks. Examples of items that fall into the intangible digital property category include e-learning materials and audiovisual materials sold as digital products that do not exist in a physical form.
North Carolina and other states are changing their laws to account for the increasing sales of goods and services over the internet, which are eroding states’ traditional sales tax bases—such as tangible goods sold by brick-and-mortar stores.
The new law law will apply to sales occurring on or after October 1.
Definition Includes Remote Sales
The broader definition of taxable sales in North Carolina will also apply to on-line sales by remote merchants. Under the U.S. Supreme Court’s Wayfair decision on June 21, 2018, a state can tax online sales by out-of-state sellers that have a nexus in the state. Nexus is defined by each state, and includes the amount of total sales to residents in the state.
The North Carolina Department of Revenue defines nexus as having more than $100,000 in sales, or 200 separate transactions, to customers in the state in a year. Remote merchants who meet this threshold must register with the state, collect and remit the tax owed, and submit audited sales data. Following the Supreme Court decision, the Revenue Department began collecting the tax November 1, 2018.
However, the North Carolina General Assemby did not pass legislation authorizing these actions. Thus, the state is collecting sales taxes on online sales from out-of-state companies without an adequate statutory basis, says Joe Coletti, a senior fellow at the John Locke Foundation in Raleigh, North Carolina.
“State legislators would have better spent their time defining the threshold and setting rules on audit liability for companies to begin collecting sales taxes on transactions into North Carolina,” Coletti said.
‘Provides a Little Clarity’
The new law provides a better definition of what online services and products are, Coletti says.
“The law provides a little clarity on what is taxable, because it is helpful to have a general definition of ‘item’ instead of trying to discern a service from personal property or digital property,” Coletti said. “This makes the law more convenient for regulators, as it lumps the sale of just about anything in any way as a taxable transaction.”
Vivian E. Jones ([email protected]) writes from Murfreesboro, Tennessee.
Joseph Coletti, “Should Out-of-State Companies Collect Sales Tax?” John Locke Foundation, September 27, 2018: https://www.johnlocke.org/update/should-out-of-state-companies-collect-sales-tax/