Sales Tax Slice: Is a Foggy Future on the Horizon for 'the Internet of Things'?

When the announcement of an even slicker or faster smart phone, tablet or computer hits the airwaves, right when you thought you had finally figured out how to use your current device, you can’t help but to shake your head and think “wow, technology is advancing too fast.” Because of this, states may have to make decisions on how to tax these new advancements. For example, in the past few years, with the rapid advancement of cloud-computing software and services, we have seen many states take a stance on its taxability.

A current hot topic in the technology world is the “internet of the things.” The internet of things is the concept of connecting devices to each other via the Internet. This doesn’t just apply to your cell phone or computer, but to devices like your car, coffee maker, home thermostat, or even oven. We have already seen the concept in action with devices that allow you to turn on the lights or heat in your home---while you are out to dinner. But as technology advances, what if you are able to pre-heat your oven, in your car, on the way home from work? If that is hard to grasp, now think about what this may mean for sales and use tax.

Do sales and use tax implications exist in the internet of things? To determine whether a tax applies, states first usually classify what it is being taxed. Unfortunately, this seems to be the most difficult part of the analysis. Is your device providing a service when it is able to access your other device to carry out a task for you?

I n most states, services are exempt from sales and use tax, unless specifically designated as taxable by statute. It’s possible then that states may create an exemption for this “service,” but then again maybe not, if applying tax to the “service” has the ability to generate new revenue for the state. It’s also possible that states may not call this a service at all, but will lump this new technology in with how it taxes computer software. Computer software is subject to sales and use tax as tangible personal property in most states.

Other states may conclude that telecommunications taxes should apply to the added charges we pay for our cars or appliances to communicate with us and one another.

While the emergence of the internet of things is relatively new, we can’t help but think how states will respond. The rationale behind the connectivity of all of our devices is to make our lives easier. But tax law doesn’t always follow suit.

By Ean Hamilton

Continue the discussion on Bloomberg BNA’s State Tax group on LinkedIn How long do you think it will take states to take a stance on the taxability of "the interent of things?"

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