Sales Tax Update – March 2025

North Carolina Clarifies Subscriptions to Access Software vs. Digital Content

In a November 1, 2024 decision, the North Carolina Department of Revenue determined that a subscription to access digital content is taxable, whereas the same subscription to access nontaxable content is not subject to sales tax.  Taxpayer, for a subscription fee, provided users with access to its online learning platform, through which users could access songs, videos, books, printable worksheets, online video games, quizzes and other learning activities.  Users could also access online support via a chat feature.  Experiences can be adapted to be unique for each user, and the products may be accessed remotely via a web browser or via an application that may be downloaded to a customer’s device.  Though North Carolina Code Section 105.164.3(33) imposes sales tax on specified digital products, it does not include information services or educational materials.  North Carolina Code Section 105.164.3(253) defines specified digital products to include digital audio works, digital audiovisual works and digital books, under which the Department concluded many of the products on the Taxpayer’s platform fell.  In addition, North Carolina does not impose sales tax on Software As a Service. 

The Department noted that

While Taxpayer uses software and databases to deliver the content to its customers, the customers are paying for access to the Digital Content and not for the underlying software that is used by Taxpayer to deliver the content. Most, if not all, modern on-demand or streaming digital media content providers use software and databases to deliver content to their customers. The software sorts and allows for searching of the content. The use of such software by the content providers does not allow the providers to avoid tax on their sales of certain digital property. The use of such software by Taxpayer is part of the sales price of certain digital property. Finally, Taxpayer’s products also provide at least one service that would not be subject to sales and use tax as a standalone product. An example would be the math learning software when provided online without the download of prewritten computer software. The standalone sale of this product would be software as a service, a nontaxable service in North Carolina. Since this product is sold for one nonitemized price with the taxable Digital Content, and it appears to meet the other requirements of a bundled transaction, the sale is a bundled transaction.

[SUPLR-2024-0011, North Carolina Department of Revenue (November 1, 2024)]. This decision drives home the point for companies to ensure they understand that it is not simply enough to evaluate your cloud-based on SaaS offerings under the multistate, unamimous determination that if it is Software As a Service, that is how a state will classify it for sales tax purposes.  The fact that a subscription to access a software platform is not determinative of its sales tax classification in many states.   Companies, and their advisors, must consider what is being accessed, what is being provided to the user, how is it being accessed, how is it being delivered to the user, and how much control over the platform does the user have.

Sales Tax on Credit Card Processing Fees

Remote sellers and customers rely on delivery vehicles and state transportation infrastructure for delivering goods purchased online.  States – beginning with CO and MN – have begun to tap into imposing fees (read taxes) on delivery of online purchases.  With the proliferation of online shopping, the use of credit cards to complete these purchases has also increased. 

Like retail delivery fees, a number of states will see the imposition of sales tax on credit card processing fees, as a means of increasing sales tax revenue without having to go through legislative or administrative procedures.  For example, in General Information Letter ST 24-0042-GIL the Illinois Department of Revenue makes I clear that it considers these fees are part of the retailer's costs of doing business and are not deductible from the gross receipts subject to tax. Retailers that use a credit card payment processing business to collect payments from their customers, minus a processing fee, must include those processing fees in their gross receipts in determining Illinois sales tax liability. [General Information Letter ST 24-0042-GIL, Illinois Department of Revenue, December 11, 2024, released February 2025]  New Jersey, Texas and Wyoming also provide that swipe fees are taxable if product is taxable.  This is a reminder that companies and their advisors must review whether states will consider such fees to be part of taxable receipts.

Learning From Other Taxpayers

When we take over the sales tax return process for clients, as a matter of protocol, we recommend a comprehensive review of the tax settings (ie, tax codes to which products and services are mapped; nexus settings in which sales tax is turned on, and; filing calendars).  Occasionally, clients opt to forgo this review and simply have us link their current filing calendar into our console – “as is” so to speak.  Without fail, when we take this approach, we end up identifying and fixing errors in how their products are mapped to tax codes.  We also end up identifying overlooked nexus, or states in which nexus was set to collect sales tax when the taxpayer should be collecting vendor use tax as a remote seller.  Lastly, we end up identifying and correcting overlooked changes to the taxpayer’s filing frequency, which may have changed many periods ago; or worse, we find instances in which the taxpayer has been filing the wrong form for many tax periods, going back several years at times. 

Of course, we are then engaged to fix the errors and amend returns or backfile missing returns.  However, these process enhancements typically occur over time during the course of managing the return process for the taxpayer, as opposed to wholesale – all at one time – when we initially take over the sales tax return process for clients, and per the recommended protocol, we conduct a comprehensive review of the tax settings.  At the end of the day, we get to the same place – that is, a significantly enhanced and streamlined compliance process that we manage, and that minimizes audit risk for the taxpayer – however, it is far more efficient and less expensive – considering interest alone – when we do this at the outset of the managed return engagement.  And, of course, we also walk way from the recommended review with certainty that we have identified the errors, whereas with the “wait and see” approach, we never truly know if we have caught and fixed everything.

Moral of the story: given the choice between conducting a comprehensive review of the tax settings at the outset of the managed return engagement and adopting a “wait and see” link and file approach, it is far more efficient, less expensive, and creates a certainty that “no stone has gone unturned” when we do this at the outset of the managed return engagement.