Pennsylvania Sales Tax Goes Digital

Effective August 1, 2016, Pennsylvania’s sales tax will be imposed on the sale of digital products. Thus, sellers of digital products should start collecting Pennsylvania sales tax on such sales to customers located in Pennsylvania. This is a significant expansion of the sales tax base in Pennsylvania, with purchases of music, smartphone “apps,” and online video streaming subscription services all falling within the scope of the legislation.

Specifically, the legislation (House Bill 1198), which was signed into law by Governor Wolf on July 13, 2016, expands the definition of taxable “tangible personal property” to include “electronically or digitally delivered, streamed or accessed”:

• video
• photographs
• books
• any other taxable printed material (e.g., works of art)
• applications, commonly known as apps
• games
• music and any other audio (including satellite radio service), and
• canned software.

The legislation also includes in the definition of “tangible personal property” a catchall provision for “any otherwise taxable tangible personal property electronically or digitally delivered, streamed or access.” Under the new rules, these products will be taxable regardless of whether the product is purchased singly, by subscription, or any other arrangement. For example, not only will purchasing a movie for permanent use be taxable (e.g., purchasing and downloading a movie from an online seller), so too will monthly subscriptions to access movie libraries of a provider (e.g., Netflix).

The amendment to the law notably includes the taxability of remotely accessed canned software (i.e., software-as-a-service or SaaS). Although Pennsylvania did not previously have a regulation or statute on the books that reflected SaaS as being taxable, the Department of Revenue has taken the position that the sale of SaaS subscriptions fees are taxable since 2012 (See Penn. Sales And Use Tax Ruling, No. SUT-12-001, 05/31/2012). The legislation makes it clear that charges for maintenance, upgrades, or support of remotely accessed canned software, and any other product now included in the definition of “tangible personal property, are also subject to tax.

Pennsylvania purchasers (especially businesses) of digital goods from sellers that are not obligated to collect Pennsylvania sales tax should assess whether they need to start accruing and remitting use tax on such purchases. Pennsylvania is not the only state that taxes digital products. Other notable jurisdictions taxing digital products to some extent include Connecticut, Indiana, Kentucky, Minnesota, North Carolina, New Jersey, Texas, and Washington.

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