Technology is changing at a rapid pace, which can have major impacts on how we live and work. We have seen an increase in sales of electronic books, streamed music, audiovisual works, and greeting cards among other electronic items. And that has a direct impact on sales tax revenues. In North Carolina, the legislature recently changed the sales tax laws to include certain digital property in the tax bracket. In this post, we look at how digital property tax has evolved since its inception on 1st Jan 2010.
Digital Property Tax Enactment in 2010
On January 1st, 2010, North Carolina enacted the digital property sales and use tax. The law stated that sales tax applies to property accessible through electronic means sold in a tangible medium. At that point, sales were only applicable if the property had a taxable physical counterpart. The digital property taxed under this new enactment includes audio works, audio-visual works, books, cards, and photography among other items.
At this point, the legislation was a bit confusing because some items may fall into the digital property category but don't have a physical counterpart. For example, materials for eLearning that don't have a physical counterpart can not be taxed.
North Carolina Senate Bill 523 Effective 1st October 2019
Gov Roy Cooper signed senate bill 523 making amendments to the sales and use tax on digital property. The bill's aim broadens sales and uses a tax. Further, the bill clarifies that the sales and use tax imposes certain digital property. Certain digital properties include:
- Digital property delivered or accessed electronically
- Any digital property which is not considered personal property. Below is the list of items that are taxable based on the bill.
- Audio works
- Audio-visual works
- Books & magazines
- Newspapers & newsletters
- Reports & other publications
- Lastly, photographs and greeting cards
The bill excluded information services from the category of certain digital property. Also, in the bill, the clause on whether a product has a physical counterpart was excluded. Additionally, the word 'item' defines tangible personal property or a service. That was to create consistency in the sales and use tax.
H.B 1079 Signed on June 5, 2020
The onset of the pandemic necessitated online learning and Gove Roy Cooper signed H.B 1079 to reduce the sales tax burden and business on learning institutions. The amendment clarifies the following:
Delivery of digital training to the following institutions is non-taxable:
- Public and private universities
- Colleges & community colleges
- Proprietary schools, and religious schools
- Vocational training
The bill clarifies that the delivery of educational materials is non-taxable whether done in person or online.
- Digital audio works or audio-visuals sold to home schools are exempt from tax as long as they qualify as an educational expense.
- Digital audio works or digital audiovisuals that contain non-taxable service content and are transferred during the period it's happening are exempt from sales tax. For instance, music lessons, financial planning seminars live-streamed via conferencing app such as zoom. However, pre-recorded webinars or on-demand webinars are taxable.
Learn More About Digital Property Sales and Use Tax
Digital Property that is taxable includes:
- Audio works
- Audio-visual works
- Books & magazines
- Newspapers & newsletters
- Reports & other publications
- Lastly, photographs and greeting cards
Non-taxable digital materials are:
- Digital training materials for education purposes
- Digital property that includes non-taxable service materials such as music lessons
- Sales of digital materials to homeschool owners are exempt from tax
North Carolina retailers that sell digital goods should be aware of the changes in how sales tax is imposed. Taxpayers can contact their state and local counsel for advice about what these alterations will do to your business transactions, so it's best not to wait until there are issues!