The emergence of new digital technologies – and the lifestyle changes that come as a result – have thrown a wrench into the entire sales tax collection process. How could legislation that was designed for a world where the vast majority of shopping activity was completed in stores keep up with the needs of eCommerce and digitally-enabled consumers?

The simple answer is that it couldn’t. New tax laws are emerging on a consistent basis, with many aimed specifically at the issue of digital goods.

What is Changing?

Digital services are becoming increasingly common and accessible for businesses and consumers alike, disrupting traditional markets. 

All this disruption creates legislative uncertainty. This led to the landmark “Wayfair vs. South Dakota” decision that created a precedent for requiring businesses to collect sales tax if they have economic nexus in a state – meaning they complete a certain number of transactions or generate enough revenue in their volume of sales, depending on specific state laws.

Even after the Wayfair case, there are still areas of uncertainty, especially as states have variable legislation that businesses must deal with. In the past year alone, five states have made changes to their policies for taxing digital goods. As such, the first step to figuring all of this out is to determine if you need to collect tax for digital goods or services you sell.

How to Determine Taxability

Identifying if your services qualify for sales or use tax is the first step in the collection process. States are beginning to define different digital products and services for tax purchases. Iowa, for example, specifically included software-as-a-service products and electronic file storage in its tax law. Other states have developed similar measures, but the rules are not only highly varied between jurisdiction. Some also handle taxation in different ways based on the type of consumer.

As such, you’ll need to go through all the goods and services you offer and determine if they are taxable. This is typically a four-step process:

1. Consult the primary tax laws for the states where you have customers.
2. Evaluate the specific definitions of the key legislative terms used.
3. Identify if there are any exclusions or exemptions mentioned.
4. Consider if the law differentiates taxability based on how a digital good is offered.

Once you know whether your goods are taxable, you’re ready to consider how you’ll comply.

How to Comply with Tax Law

Compliance is complicated, in that you have to worry about differing laws between states and even within local jurisdictions. To do this, you need to:

• Identify where you have nexus: Analyze your transaction data and product types to determine when you have reached various thresholds and are required to collect tax.
• Categorize products based on tax law: If you categorize your product to reflect where they fit into tax law, you can more effectively collect tax properly based on the product type.
• Automate collection: Compliance is easier if it’s automated. Once you know the rules you need to follow, you can configure software to automate collection and filing for you.

Of course, automation requires the right technology to help you get the job done.

What to Look for in Tax Management Solutions

While there may be a wide range of specific features your business needs, the fundamental requirements you should consider for any tax management tool are:

• Key product categories: If the software doesn’t support filing for product categories that are key to your business, then it won’t  help you much.
• Important calculation capabilities: Software can make your life easier by gathering transaction data and calculating sales tax for you, in compliance with tax law.
• Reporting tools: Visibility into tax collection is key for internal and potential state audits. Reporting capabilities simplify the process.

The right software can make a big difference in helping you keep up with the changing tax environment surrounding digital goods.

Getting Ahead on Digital Goods Tax Management

The rapidly and consistently changing digital goods tax environment can put a lot of strain on your business. You can be left scrambling to keep up with shifting laws while manually analyzing your products and transaction records along the way.

Sales tax management solutions like TaxJar ease this burden. Our software is designed to automatically incorporate tax law into the data workflows that go into logging transactions and calculating sales tax collection. You can even use our solution to auto-file in compliance with shifting laws. Check out the full webinar for more detail on the issues surrounding sales tax collection and how you can manage the process.