A bill (AB 447) was introduced on March 25th in the Nevada Assembly that would create a broad new excise tax on the retail sale of “specified digital products” to Nevada customers. Instead of expanding the scope of Nevada’s sales and use tax, the bill would enact an entirely new chapter of the Revenue and Taxation Title imposing this new excise tax. Currently, sales of digital products, including electronic transfers of computer software, are not subject to the sales and use tax. Thus, the new proposal represents a major policy departure from the status quo. The introduced bill also would create inconsistencies with the Streamlined Sales and Use Tax Agreement (SSUTA)—to which Nevada is a member state—and contains many potential violations of federal law under the Permanent Internet Tax Freedom Act (PITFA) that do not appear to have been carefully considered.
Broad New Tax
Specifically, the bill would impose the new excise tax “upon the retail sale of specified digital products to an end user in this State . . . [and] applies whether the purchaser obtains permanent use or less than permanent use of the specified digital product, whether the sale is conditioned or not conditioned upon continued payment from the purchaser and whether the sale is on a subscription basis or is not on a subscription basis.” Based on this broad imposition, subscription-based services and leases or rentals of “specified digital products” would be covered by the new tax. “Specified digital products” is defined as “electronically transferred: (a) Digital audio works; (b) Digital audio-visual works; (c) Digital books; (d) Digital code; and (e) Other digital products.” Except for “other digital products,” these terms are defined consistently with the definitions in the SSUTA (of which Nevada is a member). The bill defines the term “other digital products” as “greeting cards, images, video or electronic games or entertainment, news or information products and computer software applications.”
Consistent with SSUTA?
The definition of “tangible personal property” for purposes of the Sales and Use Tax Act will continue to include “prewritten computer software . . . [but] does not include any products that are transferred electronically to a purchaser.” Nev. Rev. Stat. Ann. § 360B.485. While the term “computer software applications” is not defined in AB 447, the inclusion of electronically transferred computer software applications in the new excise tax on specified digital products leaves open the possibility for “computer software applications” to be broadly interpreted to capture electronically delivered prewritten computer software and all three cloud computing service models (SaaS, PaaS and IaaS). However, such an approach would conflict with Section 333 of SSUTA, which states that computer software shall be excluded from the imposition on digital products transferred electronically. While the reference to administration consistent with the SSUTA in the bill should prevail, as introduced, AB 447 would create a potential grey area that could lead to dispute if aggressively enforced. Furthermore, the broad nature of the proposed specified digital products imposition, including applicability to subscriptions and purchasers with less than permanent use of the specified digital products, means the proposal may be aimed at remotely accessed digital products such as subscription audio, video and gaming services.
The amount of the new tax would mirror the sales and use tax rate on sales of tangible personal property, which would be multiplied by the gross receipts of the retailer. Gross receipts, sales, retailer and other non-digital terms of art are defined almost exactly the same as they are currently in the Sales and Use Tax Act. Likewise, nearly all of the administrative requirements of the Sales and Use Tax Act would apply to the proposed new specified digital products tax chapter. However, in a departure from the SSUTA, AB 447 provides different sourcing rules applicable to specified digital products. The SSUTA provides a five-tiered sourcing rule while AB 447 only has two tiers. While the bill’s two-tiered sourcing rule is adapted from the third and fourth tiers of the SSUTA rule, it omits the other three. This sourcing inconsistency appears to be a violation of the SSUTA. See SSUTA Section 309(A) (stating that “[e]ach member state shall agree to require sellers to source the retail sale of a product in accordance with Section 310 or Section 310.1. Except as provided in Section 310.1, the provisions of Section 310 apply to all sales regardless of the characterization of a product as tangible personal property, a digital good, or a service.” If enacted, this, among other provisions of the bill, would put Nevada out of compliance with the SSUTA and expose it to sanctions from the SSUTA’s governing board.
PITFA Concerns Galore
The bill also creates possible violations of the PITFA, which bans multiple or discriminatory taxes on electronic commerce. PITFA prohibits states from imposing tax on an online version of something if the similar offline version is not subject to tax. It also prohibits a state from imposing different rates or obligations to collect on online service providers. As introduced, the bill imposes tax on numerous categories of products delivered electronically, while the non-electronic versions are not subject to tax. For instance, the bill would subject electronically transferred “news” to the tax, while newspapers are exempt from the sales and use tax. The bill would subject “video or electronic games” to tax while there is no tax on playing pin-ball machines or video games at an arcade. The new tax extends to electronically transferred “entertainment.” While Nevada has a separate tax on live entertainment, there is still the possibility for different tax treatment and obligations based on whether the entertainment is provided by an online service provider due to the application of the non-uniform sourcing rules that would be created. Therefore, simply taxing both online providers and providers of similar services delivered through other means may not be sufficient to prevent a PITFA violation if the application of the tax obligations is incongruent. Potential PITFA violations do not seem to have been carefully considered in the introduced bill, making the treatment of certain digital goods and services ripe for litigation if AB 447 is enacted as introduced.
Practice Note
As introduced, AB 447 would take effect “upon passage and approval for the purposes of adopting regulations and taking such other actions as are necessary to carry out the provisions of this act and [sic] on January 1, 2020.” While slightly ambiguous, the introduced bill appears to take effect on January 1, 2020, for purposes of enforcement, but upon passage and approval for purposes of taking the necessary actions (such as adopting regulations) to begin implementing in 2020. The Assembly Committee on Taxation is scheduled to take up AB 447 at a public hearing next Thursday, April 4 at 4:00 pm in Room 4401 of the Grant Sawyer State Office Building. As introduced, the bill would require a two-thirds majority vote of each chamber to be enacted.
