Welcome to TWIST for the week of December 19, 2022, featuring Sarah McGahan from the KPMG Washington National Tax state and local tax practice.
First up today, the Florida Department of Revenue has issued a Technical Assistance Advisement concluding that receipts from sales of access to online learning services were subject to Communications Services Tax or CST. The taxpayer contended that its service should be considered an exempt information service. However, the Department noted that the definition of information service expressly excludes any “video service.” In the Department’s view, the taxpayer’s cloud-based platform that allowed customers to stream and download educational courses was subject to the CST as a “video service.”
In Ohio, enrolled House Bill 223 expands an existing sales tax deduction for bad debts by allowing vendors to deduct bad debts on certain third-party accounts affiliated with the vendor. The deduction would be allowed even though the debt is charged off on the books of the third party and not the books of the vendor.
In other news, on January 1, 2023, the rate of sales tax imposed on sales of food will be reduced in two states. In Kansas, the state sales tax rate on food and food ingredients will be reduced to 4.0 percent. The state sales tax rate on food will further decrease the following year and will be reduced to zero on January 1, 2025. In Virginia, sales of food for home consumption and essential personal hygiene products made on or after January 1, 2023 will be subject to a reduced 1.0 percent rate. Both states have issued guidance addressing the rate reductions.
This is our last TWIST for 2022. Thank you for listening and we’ll resume in 2023. Happy holidays and Happy New Year!
The Florida Department of Revenue (Department) issued a Technical Assistance Advisement (TAA) addressing whether the state’s Communications Services Tax (CST) applied to sales of online learning services and internal email services. The taxpayer—an online professional network platform that allows individual and business members to stay connected—provided an online educational service whereby users could access courses and instructional videos. The online courses could be streamed via the taxpayer’s website or downloaded onto an app. Customers were charged based on the purchase of individual courses or on a monthly or yearly premium subscription to access unlimited courses. The taxpayer also provided an internal email service that allotted a certain number of credits each month to premium users, which enabled them to send internal email messages to other members.
Under Florida law, the CST is imposed on the sale of communications services sold at retail. The term “communications services” is defined broadly and means, in pertinent part, “...the transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals, including video services, to a point, or between or among points, by or through any electronic, radio, satellite, cable, optical, microwave, or other medium or method now in existence or hereafter devised, regardless of the protocol used for such transmission or conveyance...” An exemption exists for sales of an “information service.” The definition of an “information service” is also broad, but specifically excludes a video service.
The taxpayer argued that the sale of access to its online learning service should not be considered a communication service because the service did not enable users to communicate and, in the taxpayer’s view, did not meet the definition of a video, audio, or other programming service. Instead, the taxpayer contended that the service should be considered an exempt information service. However, the Department noted that the definition of information service expressly excludes any “video service.” In the Department’s view, the taxpayer’s cloud-based platform that allowed customers to stream and download courses was subject to the CST as a “video service.” A service, the Department observed, could not be an information service if it also met the definition of a video service. The Department further noted that the definition of a video service did not include a test of the taxpayer’s primary purpose for entering into the transaction. In other words, if a service was a “video service,” it was subject to CST even if the taxpayer’s intent was to obtain information and compiled data. The Department did not address the taxpayer’s position that it should follow an earlier ruling (TAA 19A-015), in which the Department ruled that charges for providing online courses were not subject to CST.
By contrast, the Department determined that a customer’s primary purpose in acquiring the email service was to retrieve and deliver data. As such, it was the Department’s view that the internal email service fell within the statutory definition of information service and was therefore exempt from the CST. Please contact Ben Cella with questions on TAA 22A19-002R.
The Ohio Legislature recently passed House Bill 223. If enacted, this bill would allow vendors to deduct bad debts written off as uncollectible by certain third-party lenders. Under existing law, only vendors or certified service providers that generated a bad debt and charged that debt off as uncollectable may claim the bad debt deduction. As amended, a vendor would be allowed to deduct bad debt held by a third party through a “private label credit account” that was associated with a sale that the vendor reported on a previous return. A private label credit account would be defined as an account with a lender (typically a bank) that “carries, refers to, or is branded with” the name of the vendor and which is used to finance sales on credit by the vendor’s customers. Unlike situations in which the vendor held the debt directly, the vendor would not be permitted obtain a refund from the deduction of third-party debt, but unused third-party bad debt could be carried forward indefinitely and used to offset future taxable receipts. A vendor taking a deduction under this section would be required to maintain books and records verifying the transaction. This bill has been passed by both houses of the Ohio State Legislature and is currently awaiting Governor DeWine’s signature. Please contact Dave Perry or Greg Ruud with questions on enrolled House Bill 223.
Recently, the Kansas Department of Revenue Issued Public Notice No. 22-15, addressing the reduction of the state sales and compensating use tax on food and food ingredients effective January 1, 2023. Under current law, state sales tax of 6.5 percent is imposed on food and food ingredients. In addition, cities and counties impose local sales tax on food and food ingredients at various rates. On January 1, 2023, the state sales tax rate on food and food ingredients will be reduced to 4.0 percent. Beginning on January 1, 2024, the state sales tax rate on such products will be reduced to 2.0 percent. The state sales tax rate on food and food ingredients will further be reduced to zero on January 1, 2025. Sales of food and food ingredients remain subject to local sales taxes imposed by cities and counties.
In Virginia, food for home consumption and essential personal hygiene products are currently taxed at a reduced 2.5 percent rate. This rate is comprised of a 1.5 percent state tax and the statewide 1.0 percent local option tax. Beginning January 1, 2023, the 1.5 percent state rate levied on food and essential personal hygiene products is eliminated. Food and essential personal hygiene products will continue to be subject to the 1.0 percent local option tax and will continue to be exempt from all regional and additional local tax rates. Sales of food and essential personal hygiene products made on or after January 1, 2023 will be subject to the new reduced tax rate. Items delivered to a purchaser and paid for on or after January 1, 2023 will be taxed at the 1.0 percent rate, regardless of when the property was ordered. The decreased rate will not apply to items delivered prior to January 1, 2023, but paid for on or after January 1, 2023. The new rate will be reflected on the January 2023 sales tax return, due February 20, 2023. Please stay tuned to TWIST for future updates on sales tax rate changes.