Colorado redefines tangible personal property to include streaming and cloud-based offerings like Amazon Web Services, confusing sourcing and creating uncertainty.
At some level, I can understand states taxing streaming services such as Netflix, Amazon Prime, Hulu and Apple TV because of streaming’s roots. It used to be in the days of Blockbuster (remember them?) that renting a thing—a VHS or DVD—was taxable at the point of sale, the same as if you bought it outright.
Fast forward (no pun intended) and now more states are taxing streaming similar to how they taxed the VHS or DVD. By analogy, streaming is simply replacing the rental of the disc with the rental of the right to view it in a different manner, all of which requires equipment. The internet is not in the air; it manifests in items like servers, cables and wires, powered by electricity connected by technology to the world wide web. Most states tax both cable TV and telecommunications – so tangible or not, there is some policy behind taxing streaming.
Another digital product and service is the outsourcing of servers or data storage to vendors like Amazon Web Services (AWS). This is happening everywhere and not going away. Thus, states are changing their tune and beginning to think of taxing AWS not as a service where the vendor pays use tax on the assets used to provide the service, but instead taxing the service itself to the end-user. That one has got me scratching my head because it’s a change in the character of the tax imposed altogether (use tax to sales tax) and seemingly not a logical extension of the originally taxable item (tangible personal property to service).
Colorado most recently jumped on this taxation bandwagon with the passage of HB21-1312 on June 24, 2021. The Act codifies the Department of Revenue (DOR) rule to include “digital goods” in the definition of “tangible personal property.”
Effective July 1, 2021, the Act expands sales and use tax to cover a wide range of digital goods, including mainframe computer access, photocopying and packing and crating—what packing and crating has to do with mainframe computer access is beyond me. The law also disallows the state sales tax vendor fee for retailers with a substantial amount of taxable sales during the filing period.
Colorado’s new definition of tangible personal property includes mainframe computer access used for cloud-based data storage services, think AWS and the like. Taxing cloud-based offerings confuses sourcing and creates use tax uncertainty, which is an argument I’ve made to the Colorado DOR.
Who pays what and when? Even the state of Colorado is not sure how to enforce this Act. Certainly, vendors and their purchasers have no idea as to how exactly the services are provided. Compare AWS to telecommunications, which is provided by towers, wires, satellites, switches and ultimately two phones on either side. That sourcing of the revenue has been challenged in the courts, typically to the billed person for the minutes used, which goes to two states–the one where the call originated and the second to the state where the call is received.
Will the DOR require something similar or look to where the servers are located to source the sale, despite the fact that the customer paying for the AWS-like services is in a completely different state than the servers it is storing data on?
We’ll keep you posted on developments here. As questions come up, contact your TaxOps advisor for guidance.