Sharing Economy Poses Tax Challenges for States

May 31st 2017
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Senior state tax officials are struggling with how to handle the gray areas of the sharing economy, and the issue isn’t going away anytime soon.

In Bloomberg BNA’s 2017 Survey of State Tax Departments, a new category addresses sales tax collection obligations related to the sharing economy.

According to the survey, only eight states so far said they’d require companies like Uber and Lyft to collect sales tax. Several states indicated that this was a nontaxable transportation service.

In response to questions related to short-term accommodations facilitated by third-party sites like Airbnb, 25 states indicated that the owner of the property is responsible for collecting sales tax, while 15 states said the third-party facilitator was responsible.

Some states, including Colorado, Iowa, and North Carolina, noted that the owner and the third party are jointly liable for the collection of sales tax.

Many experts agree that placing the collection obligation on the third-party facilitator makes the most sense for states.

“Placing the responsibility of collecting the sales tax on a third-party facilitator would be less burdensome administratively for the state than placing the collection responsibility on each separate owner,” Priya Nair, a state and local tax manager at Grant Thornton’s National Tax Office in Washington, DC, said in the survey report.

Elsewhere in the report, senior state tax officials clarified how they are taxing other gray areas of sales and use tax and corporate income. The emphasis is on nexus policies and the sourcing of receipts for income tax purposes.

Here’s a look at some of the survey’s other findings:

Corporate Income Tax Nexus

  • Thirteen states said their nexus standard is based on factor presence. Of these states, five indicated that they conform to the Multistate Tax Compact’s model statute, Factor Presence Nexus Standard for Business Activity.
  • States were asked questions regarding adoption of the Multistate Tax Commission’s statements on federal Pub. L. No. 86-272, which prevents corporate income tax from being imposed on certain out-of-state companies that only solicit orders in state. Nine states said they were a signatory to the Phase II statement, four states said they were a signatory to the Phase II statement with additions or exceptions, and two states said they have a similar law.
  • In ownership of pass-through entities, states were asked to indicate whether nexus would be created as a result of an ownership interest that limits its activities to those that generate passive income. Thirty-one states said a limited interest in an entity that manages intangible investments would create nexus. But 38 states said a limited interest in an entity that manages real property would create nexus.
  • Twenty-two states said employees of an out-of-state corporation flying into the state on a commercial airline for business purposes, one to four times in a year, would be sufficient to create nexus.
  • States were asked to identify source receipts from cloud computing or Software as a Service (SaaS). Nineteen states said they used market-based sourcing, nine said they used cost of performance, and four said they used a sourcing method other than cost of performance or market-based sourcing.

Pass-Through Entities

  • Eighteen states classify guaranteed payments for services, other than personal or professional services, as business income, while two states classify these payments as nonbusiness income.
  • States were asked about the tax treatment of gain recognized by the disposition of an interest in a pass-through entity doing business in their state. Twenty-eight states said they’d impose income tax on gain recognized by the disposition of an out-of-state corporation’s limited interest. Nineteen states said they’d impose income tax on the gain recognized by the disposition of a nonresident individual’s limited interest.
  • Thirty states said that nonresident owners/members/partners subject to withholding or composite returns should file a return to receive a refund.

Sales Tax Nexus

  • Nineteen states indicated that entering the state solely for purposes of conducting disaster relief operations would create nexus, while 13 states said it would not.
  • Five states said that making remote sales of digital content downloaded by residents in the state would create nexus. Only three states said that making remote sales of digital content that is accessed but not downloaded by residents would create nexus.

Sales Tax Refunds and Qui Tam Cases

  • Thirty-one states said they require vendors that obtain a sales tax refund to refund the tax to their purchasers.
  • Maine, Nevada, and Rhode Island said they have a false claims act under which a private party may bring a lawsuit against a taxpayer for underpaying tax.
  • Six states said they have a consumer protection law that says they can bring class-action lawsuits against vendors for overcollected sales or use tax.

Forty-nine of the 50 states (Ohio was the exception) and the District of Columbia participated in the Bloomberg BNA survey.

Related articles:

5 Key Tax Issues in the Sharing Economy
State Tax Policies Vary Widely on Nexus, Sourcing