Arkansas Rules on the Taxability of Electronic Services and Products

Arkansas issued two opinions demonstrating the complexity of characterizing technology transactions for sales tax purposes and that certain historically nontaxable transactions may become taxable when provided through technology.

By Tina M. Chunn, SALT Senior Manager

As technological innovation continues to change the manner in which traditional goods and services are provided, it becomes increasing difficult to determine how a transaction should be treated for sales tax purposes.  More products and services are being delivered electronically and state tax law does not always specifically address these types of services or products.  Recently, Arkansas released two separate legal counsel opinions pertaining to the sale of electronic services and products to help clarify some of this ambiguity.

In the first opinion, Arkansas addresses the taxability of an electronic service.[1]  The taxpayer is an internet business in Arkansas that provides a service where its customers pay an annual fee to upload specific information to its website to be delivered to a third party (such as a personal representative or trustee) upon confirmation of their death by the Social Security Administration. This information from the customer will be provided via email and may include information only to be relayed upon their death.  The taxpayer inquired if providing this information electronically would be considered a taxable service.

The opinion concluded that this service was not taxable.  In Arkansas, gross receipts are levied on the sales of tangible personal property and certain enumerated services.[2]  Tangible personal property is defined as able to be seen, weighed, measured, felt or touched.[3]  Additionally, hosting an internet website and other data hosting services are not listed as taxable services.  This specific transaction relates to a sale of a service and not the sale of a digital product.  Thus, this service is not subject to Arkansas gross receipts taxes.

The second opinion pertains to the taxability of electronic video courses delivered through an online portal.4  The taxpayer provides an online customer service training program developed specifically for the healthcare field.  Employees of the taxpayer’s customer have access to an online portal where they are able to watch training videos, download handouts to complete, take notes and complete tests.  Similar to the ruling above, Arkansas determined these online courses are not tangible personal property and not listed as specifically enumerated taxable services.

However, Arkansas further clarified that the sales of (i) certain specific digital products delivered to the end user with the right of permanent or less than permanent use and (ii) subscriptions for digital audio-visual work and digital audio work to an end user that does not have the right of permanent use are subject to gross receipts tax.  These “specific digital products” include digital audio works, digital audio-visual works or digital books.  “Digital audio-visual works” include a series of related images, that when shown in a succession, impart an impression of motion with accompanying sound. [5]  Arkansas determined these electronic video courses meet the definition of digital audio-visual works and are, thus, subject to Arkansas gross receipt taxes.

A look at these two rulings demonstrates the challenges in identifying if your specific electronic service or product is subject to sales and use tax.  For example, in the online training situation, it may have been possible to view the overall transaction as a nontaxable training service.  Certainly, if the training was done in-person that’s likely how it would have been treated and it would have been nontaxable.  However, providing that same training service online through videos to which the user obtains access changes how the state views the transaction and its taxability.

The SALT team at Aprio can assist with these and other taxability determinations for services and products specific to your business so that you have the confidence that you are in compliance with the sales tax rules of each state and do not get assessed unexpected tax and penalty.  We constantly monitor these and other important state and local tax issues, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Tina Chunn at tina.chunn@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the May 2018 SALT Newsletter.

[1] Revenue Legal Counsel Opinion No. 20180219, April 16, 2018.

[2] Arkansas Code Annotated § 26-52-301.

[3] Arkansas Code Annotated § 26-52-103(21)(A).

[4] Revenue Legal Counsel Opinion No. 20170814, April 23, 2018.

[5] Arkansas Code Annotated § 26-52-301(1)(B), Arkansas Code Annotated § 26-52-103(29).

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.