On December 31, 2018, the District of Columbia enacted significant sales tax legislation that will require many remote sellers to take immediate action. This emergency legislation, passed by the Council of the District of Columbia in response to the U.S. Supreme Court’s decision in South Dakota v. Wayfair, imposes an economic nexus standard on remote sellers. Similar to many other jurisdictions’ response to the Wayfair decision, the law includes new collection obligations for marketplace facilitators. But the District didn’t stop there. This fittingly-titled legislation, the “Internet Sales Tax Emergency Amendment Act,” also expands the reach of the District’s sales tax to include the taxation of an array of digital products and services.
D.C.’s Economic Nexus Standard
The economic nexus rule went into effect on January 1, 2019, just one day after its enactment, which leaves retailers impacted by the new law with no time to prepare. Specifically, this legislation requires sellers without a physical presence in the District to collect and remit sales tax if they had, in the previous calendar year or current calendar year, more than $100,000 of gross receipts from retail sales delivered into the District or at least 200 separate retail sales delivered into the District. Thus, retailers located outside of the District need to immediately evaluate their 2018 sales to customers in the District to determine if their sales triggered either the gross receipts or separate sales thresholds referenced above. If either or those thresholds were met, then such sellers must register to collect D.C. sales tax on a prospective basis on all taxable sales.
Expanded Sales Tax Collection Obligations for Marketplace Facilitators
As with many other states, the District’s Wayfair-style bill expands the sales tax collection obligations of marketplace facilitators. The requirement will capture sales tax revenue from online marketplaces, through which small retailers sell their products. Many of those retailers may not meet the economic nexus thresholds discussed above. However, the marketplace facilitator collection obligation will result in businesses like Amazon and Walmart being required to collect the District’s sales tax not only on product sales for which they are the seller, but also on sales of products sold by third-parties through their websites. The marketplace facilitator collection obligation takes effect on April 1, 2019.
When providing an online platform, or ‘‘marketplace,’’ for the sale of a third-party’s products, companies like Amazon had generally not considered themselves a retailer. Instead, the act of providing the marketplace to the third-party seller was treated as a service. This is why a buyer may not have paid the District’s sales tax on purchases made through an online marketplace when the sale was made by a third-party seller, as opposed to the marketplace facilitator (e.g. Amazon) being the actual seller. The District’s new collection obligation will now require marketplace facilitators to collect sales tax on all sales of taxable items made on their platforms.
Digital Goods Are Now Taxable
Finally, the Internet Sales Tax Emergency Amendment Act broadens the scope of sales subject to taxation to include a range of digital goods. This new provision comes a little over a year after the District’s Office of Tax and Revenue issued guidance clarifying that digital goods were not subject to sales tax. Given that the District’s sales tax is imposed on the broadly-defined “data processing services” and “information services,” the clarification was somewhat necessary to provide clear guidance to taxpayers. Products that will now be taxed under the new law include, but are not limited to:
- Digital audiovisual works, such as downloaded or streamed movies
- Digital audio works, such as downloaded music or ringtones and streaming audio services
- Digital books
- Digital applications and games, such as those purchased on a mobile device or tablet
All of these transactions are now subject to the District’s sales tax. The taxability of these items is generally not impacted by whether the customer purchases and downloads the product, rents the product, or obtains a subscription to stream the digital content. For example, any app, song, or ringtone purchased on a mobile phone will likely be subject to the District’s sales tax. Online streaming services, such as those offered by Netflix and Hulu will similarly be subject to tax. The legislation does state that the term “digital goods” does not include cable television service, satellite relay television service, or any other distribution of television, video, or radio service subject to the District’s gross receipts tax imposed on such services.
With the continued evolution of how these types of products and services are being offered by providers, the District will likely need to issue regulations to provide clarification on the taxability of certain sales. For example, live streaming television providers may also offer on-demand streaming of various programming for a single monthly fee. Under the new legislation, such a provider is arguably providing a bundled service that includes elements subject to sales tax (i.e. on-demand streaming), as well as services subject to the gross receipts tax (i.e. streaming live television).
The Council’s Committee on Finance and Revenue estimate that this change, combined with the economic nexus and marketplace facilitator provision, will increase the District’s sales tax revenue by approximately $97 million for the 2019-2022 fiscal plan period. This revenue increase may benefit property taxpayers in the District, as the legislation provides for certain property tax rate reductions contingent on revenue goals being met.
If you have any questions regarding your company’s sales tax collection obligations, contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200.