States have been fighting to collect sales taxes from online retailers since the dawn of the e-commerce age. But today, online companies that sell services rather than merchandise also need to be concerned about state sales taxes. Even though most services are usually not subject to sales tax, some states are now asserting that certain online services are taxable either as software, data processing, or information services, even if the type of service would not be taxable if delivered the old fashioned way – by people – rather than computing platforms.
Online service companies need to be aware of these potential tax traps so they are not surprised when a state tax agency comes knocking on their door. There are numerous steps that smart companies can take to avoid unpleasant surprises.
For example, medical services are generally not subject to sales tax. However, the New York Department of Taxation recently said that an online healthcare service company must collect sales tax from its customers. The company receives biometric readings from patients, like blood pressure or glucose levels, and these readings are transmitted to the company via its Web platform. If the algorithm detects a problem with the results, it sends a text message to the patient’s caregiver. New York said that the company is providing taxable cloud computing services. If the same service was provided by a traveling nurse, it would not be subject to New York sales tax.