Taxability (Pt.1)
Michael J. Fleming is the founder and president of Sales Tax and More, a full-service consulting and solutions firm with a passion for state tax. He is one of the country's leading authorities on sales tax issues such as consulting and research, registrations, returns, nexus, drop-shipping, eCommerce, and service providers.
Michael is a renowned writer and speaker, and he regularly presents on webinars. He is also the host of the Sales Tax and More Podcast, where he shares his wisdom and learnings with his audience in order to help them navigate the tricky world of taxes.
In this episode…
Mike Fleming and Ellie Moffat discuss and answer questions about taxability.
Here’s a glimpse of what you’ll learn:
Why is the most common response to taxability “it depends”?
Why are there so many variables when it comes to taxability?
What is Tangible Personal Property (TPP)?
Are services taxable?
Connect with Michael
Episode Transcript - Audio Version
[00:00:00] Welcome to Sales Tax and More your go-to resource for all things state tax related. Now here is your host, Michael Fleming.
Michael Fleming: Hi, Mike Fleming here, founder of Sales Tax and More, and today's co-host of the Sales Tax and More Podcast where we talk about everybody's favorite topic, which is of course, sales tax. And today we're gonna talk about taxability. But first, let me introduce you to my co-host, Ellie Moffat.
Ellie Moffat: Hey everyone, thank you so much for being here. If you haven't already, please like
and subscribe to our podcast. And, I will give a quick instruction for Sales Tax and More. So we are a full service consulting and solutions firm, [00:01:00] and we have a really great team here of experienced tax professionals who are very dedicated to fulfilling your state tax and related needs.
So we do a lot of sales tax returns, sales tax registrations, consultations, research, audit defense, exemption certificate management and like our name states more. So if you have questions about our services, please reach out. We would love to hear from you and we would love to work with you as well.
And now that said, Mike, let's just jump right in here. Why is the most common response to taxability questions? It depends. And people, if they've been listening, they hear us say, it depends all the time. But why is it it depends for taxability? And why are there so many variables when it comes to taxability?
Michael Fleming: I think Ellie, great question. I think there's really two main answers to this. The first is because every state has different ideas as what should be taxable and what is not [00:02:00] taxable. So with all the different states out there, that's why there's a lot of, it depends. It depends on the state.
The second part of that is taxability is just very granular. And the facts do matter. So each set of facts can have different results. I'll give you an example. I use this example a lot in my webinars. But candy. You can have a chocolate bar, Hershey's bar, and you can have a Twix bar, which is a candy coated pretzel, and then the state of Iowa one is taxable and one is not.
And that's because the state believes that candy with flour is not taxable. And candy without flour is taxable. So that's just one of the examples of how granular items can get. Sometimes it's the size of a bottle. Sometimes it's a difference between a bottle and a can. There's all sorts of granular facts out there that can [00:03:00] impact the taxability.
Does that give you a little bit of a reason why we say it depends so often?
Ellie Moffat: I think so and to be fair, I'm doing tax stuff all day long, every day. So if you are not understanding as a listener, write in, let us know. We're happy to expand on that. But okay. Mike, what about TPP?
What is TPP? I think that people come across this term randomly sometimes, but can you talk a little bit more about what it is?
Michael Fleming: TPP stands for tangible personal property. And when we're talking about taxes, it's really something that's perceptible to the senses.
Something that can be seen, it can be touched, it can be felt, it can be smelled. That's what tangible personal property is. Now, when we say tangible personal property, a lot of people get hung up on that word personal, and right away they start thinking about things that we can carry like a wallet or a [00:04:00] handbag or a laptop computer, small things.
But TPP can be a tractor, it can be an airplane, it can be a car. They're all perceptible to the senses. There's something that can be touched, felt. So TPP is really anything. That is perceptible to the senses. And that's in direct contrast to something like digital property or real property.
Real property being real estate and digital property being, something that can be downloaded over the internet. So that's what tangible personal property is, and by default, it's generally going to be taxable. Now, we say by default what that simply means is that tangible personal property is gonna be taxable unless there's some sort of an exemption and there are lots of exemptions out there.
Exemptions can be because of the way that [00:05:00] this tangible personal property is gonna be used. For example, if I'm buying it for resale that's a specific type of use. And items purchased for resale are generally not gonna be taxable. Something can be used or consumed in the manufacturing process.
And items that are used or consumed in the manufacturing process are very often not taxable. So that's one type of exemption. Another type of exemption is by entity type. In a lot of states, local governments are often tax exempt. I say a lot of states because it's not a all states, the state of California does not exempt local governments.
All of the local governments are taxable in the state of California. When they purchase items, they need to pay tax. The city of San Francisco Fire Department for example while in other states they may be able to [00:06:00] purchase something tax free. In the state of California, they generally cannot.
And then there's exemptions that are by product. For example, in some states, groceries are not taxable, and if they're not taxable to anyone, then you usually don't have to worry about getting some type of exemption certificate. But groceries, by the way, are not taxable everywhere. In some states, they are taxable.
So those are the three major types of exemptions. And once we're outside those types of exemptions, tangible personal property is generally gonna be taxable. Any type of exemption has to be specifically enumerated or spelled out in order for the tangible personal property to not be taxable.
Ellie Moffat: And I'll just repeat that one more time. I know you just did. But yeah generally tangible personal property is taxable. Mike, that being said, what about [00:07:00] services? You briefly touched on digital property, what about services? Are they taxable?
Michael Fleming: Yes. Nowadays and a lot of smart people get this wrong.
They don't believe that services are taxable. And if we go back to the 1950s, we had a whole different economy back then. We were a manufacturing based economy. Now we've got a service-based economy and the states are playing catch up. And more and more services are being taxed by more and more states every year.
I can't think of a state that has a sales tax, that doesn't tax at least some services. And I usually get challenged on this and someone will say my state doesn't tax any services. We usually come up with some services that, that state taxes because states are a little bit slow to react.
But they're not stupid is what I say. And they know that's where the economy is nowadays, and they believe they're losing out on a lot of revenue. [00:08:00] Which is why more and more states are taxing more and more services every single year. There are four states out there and in these four states, it's South Dakota West Virginia, New Mexico, and Hawaii.
All services are pretty much taxable there. They treat services like other states. Treat tangible personal property. It's gonna be taxable unless there's some sort of specific exemption. As a matter of fact, South Dakota and Hawaii will actually tax legal services and accounting services.
They're very aggressive when it comes to services. Most states say taxes are exempt by default unless they're specifically identified. You gotta be careful there though because sometimes states have big catchalls, like the state of Texas. They tax data processing services.
Now, [00:09:00] and I learned this many years ago, but website design and website hosting. Off the top of my head, I wouldn't think of that as data processing. But for the last 20 or 30 years, the state of Texas has viewed that as data processing. So it's very well established. So we see this mistake being made quite often.
Someone's just looking at the big picture. They're looking at what the state lists as their taxable services. They don't see that website design and website hosting are taxable. So they advise their clients or if they are part of a company, they advise their company that they don't have to collect tax.
When they didn't read the fine print, they didn't look at the way that the state actually implements taxability. And the state of Texas says that's data processing. This gets so, so granular. We don't have to worry just about the [00:10:00] big picture here. We actually have to worry about the small print. The devil's always in the details.
Ellie Moffat: And that's something I hear you say a lot and really truly Mike is not exaggerating. People always challenge him on the our services taxable. And Mike, anything else you wanna add in to this bit of information?
Michael Fleming: No I think we've covered it. Rule of thumb is tangible personal property is gonna be taxable by default unless there's some sort of specific exemption.
And services are generally the exact opposite, with the exception of those four states I mentioned. They're gonna be exempt. By default unless they're identified as specifically taxable. But as I said, the devil's always in the details. You gotta drill down. And look at the way that a state actually implements it.
Look at the cases, look at not just the wording in the [00:11:00] statutes, but in the rules, the regulations, and you know how they've decided different cases out there.
Ellie Moffat: Perfect. All right. Thank you so much Mike, and thank you everyone for listening. If you have sales tax needs, we do offer many solutions and services.
You can reach out to me directly at E-M-O-F-F-A-T@salestaxmore.com, and you can also go to our website salestaxmore.com. And thank you. I guess thank you for the third time. I can't stop saying it today. So that's it for us.
Michael Fleming: Thank everyone and we hope to see you on the next episode of the Sales Tax and More Podcast.