The implementation of sales tax on the thousands of services that are delivered digitally can prove vexing.

Have you downloaded a book recently or sent an e-card? Is your billing address in Pennsylvania? If so, as of August 1, 2016, that purchase is now subject to Pennsylvania sales or use tax.

Pennsylvania has joined the litany of states that have begun taxing products that traditionally were delivered in a tangible format but, due to changes in technology, are now being delivered electronically. These so-called "digital products" include videos, photographs, music, books, any otherwise taxable printed matter, applications (apps), games, satellite radio services and canned software.1 Digital products are subject to the new tax when they are delivered electronically; that is, the product is accessed or obtained in a way other than a USB drive, DVD disc or other physical storage.2

Examples of digital products include e-books delivered on a Kindle or a similar device; iTunes downloads; streaming video services, such as Netflix or Hulu; apps and games for a phone or other mobile device; photographs delivered electronically; and e-cards. If the provider of the product has nexus in Pennsylvania, the purchase price is now subject to sales tax, and the provider is required to collect it and remit it if it is Pennsylvania sourced.

Sales are sourced based on the purchaser’s billing address rather than physical location. Thus, if a customer with a Pennsylvania billing address, while in New Jersey, downloads a song from a provider with its headquarters in California, and relevant servers in Idaho, that customer will be subject to sales tax in Pennsylvania, provided that the vendor from whom he or she purchased the song has nexus in Pennsylvania.3 Note that the download itself will not create nexus — the seller must have some other connection in Pennsylvania. Collections are required to begin on sales made on or after August 1, 2016.4

If the seller does not have nexus in Pennsylvania, and thus is not required to collect sales tax, the customer is liable for use tax on the purchase.

Sales and use tax will apply when these purchases are for some consideration.5 Thus, transfers of photographs and the like between family members for no consideration will not give rise to a sales or use tax obligation. However, maintenance, support and updates delivered electronically for consideration will be subject to the sales and use tax.6

Pepper Perspective

Pennsylvania — like many other states looking to replace lost sales tax revenue attributable to music, books, movies and software formerly being delivered via tangible media at retail locations physically within the state — has adapted its tax code accordingly. The change in the statute, as well as the announcements by the Department of Revenue, are minimalist in nature. It is likely that the Department of Revenue will have to promulgate additional guidance to address apps that are downloaded to mobile phones for free, as an example. As in other states, the transition from tangible media to digital media is easy to accommodate conceptually; however, the implementation of sales tax on the thousands of services that are delivered digitally can prove vexing. For example, tutoring services are not currently subject to Pennsylvania sales tax. However, if the tutoring is delivered via Skype or video chat, the current construction of the statute is such that it may be subject to sales tax as a result of the law change.

It is likely that the statute is designed to recapture the sales tax on otherwise taxable transactions that have gone untaxed because of technological changes, such as the change from a CD purchase to an iTunes download. Clarifying regulations or statutory modifications would help in this regard.