#6: Determing how to tax emerging technologies
In my Post Wayfair Aftershocks: Top Ten Sales and Use Tax Changes – Part 2, we took a deeper dive into the first 5 of those changes. In this blog (Part 3), we look at the effects that emerging technologies may have on sales and use tax planning and compliance.
How will all of the emerging technologies affect tax compliance and planning in general and indirect tax compliance and planning specifically?
Emerging technologies have the potential to transform the way we do business. This transformation is often referred to as “digital transformation”. Some of the most-blogged about technologies these days include blockchain, big data, analytics, Internet of Things (IoT), artificial intelligence (AI), and machine learning. Many businesses are setting up test cases, simulations and prototypes to test how these technologies impact their current and future operations. Some companies are further along than others in implementing some of these technologies in their businesses. We might say that at least these businesses are entering the “end of the beginning” stage of digital transformation.
A Simple Example to Illustrate the Evolving Tax Challenge with IoT
- It’s “just” a product. Let’s say we have a tangible product, a camera, that we sell to customers all over the country. If you can determine that this is just the sale of a tangible personal product, you then work through the complex nexus rules, as well as the sales and use tax exemption, taxability and rate rules for each jurisdiction in the country. As we all know, that process in and of itself is very complex and begs for a software solution. If you have the software in place, you can feel confident that you are complying in every relevant jurisdiction.
- It’s a product and maybe a service or both. So now, to grow the business, the company enhances the camera by adding a sensor device that responds to vibrations in a room. Above a certain threshold of movement, it will send a message over the internet through some communications device to a security office outside the home that there may be an intruder in the room. Ok have we now taken a product and turned it into a service? And if we have a service (or even the possibility of a service), we now must review all the rules in each jurisdiction for determining how to tax a service or a product/service combo, or some other such creation. If you are fortunate to have the software in place that can quickly process the transaction as a sale or a service or both, you can still have a high level of confidence that you are complying.
- It’s a product, service and maybe telecommunications. Ok now, the camera is storing and transmitting data over the internet. Are you now subject to some communications tax because some states are defining it as coming under their law? Again, without the tax research and technical expertise to address the problem, the level of confidence that you are compliant must go down.
Bottom Line: It is imperative that businesses, as well as their technical, legal, tax and accounting advisors, keep up with these new technologies and reflect applicable technologies in their tax planning and compliance solutions.
Stay up to date with rapidly changing nexus standards across the country.