The South Carolina Tax Realignment Commission (TRAC) has released its Final Report, which includes proposed draft legislation to achieve its recommendations. As expected, the recommendations include the expansion of the sales tax base to include “data processing, software delivered over the Internet, and digital products.” In addition, the recommendations include language to expand sales tax collection obligations with a New York-style click-through nexus provision and an affiliate nexus provision. Although word on the street is that the South Carolina legislature is unlikely to enact the majority of the recommendations contained in this Final Report, current economic conditions require careful monitoring of these and other tax hikes.
The TRAC proposes to achieve the tax base expansion in a curious fashion—by adding data processing, computer software, and digital products to the list of “intangibles” included in the definition of “tangible personal property.” Thus, in the topsy-turvy world of state sales tax, intangible property can indeed be taxed as tangible property. The suggested language is as follows:
“Tangible Personal Property” means personal property which may be seen, weighed, measured, touched, or which is in any manner perceptible to the senses. It also includes services . . . and intangibles, including data processing, computer software, digital products, communications, laundry and related services, furnishing of accommodations and sales of electricity, the sale or use of which is subject to tax under this chapter and does not include stocks, notes, bonds, mortgages or other evidences of debt.
The draft legislation includes a broad definition of “digital products” that includes, but is not limited to, the Streamlined Sales Tax-like definitions of “digital audio-visual works,” “digital audio works,” and “digital books.” Digital products is expansively defined to mean, “electronically transferred goods obtained by the purchaser by means other than tangible storage media.”
Likewise, “data processing” is broadly defined in the proposed statute as “the manipulation of information furnished by a customer through all or part of a series of operations involving an interaction of procedures, processes, methods, personnel, and computers. It also means the electronic transfer of or access to that information. Examples of the processing include, with-out limitation, summarizing, computing, extracting, storing, retrieving, sorting, sequencing, and the use of computers.”
These proposed definitions are so amorphous that they provide the state with the authority to tax practically any service, data, information, or digital good, so long as it is transferred electronically. This legislation could be interpreted to include information services, cloud computing, and other electronically delivered services far beyond what are specifically enumerated as taxable services in South Carolina statutes. It is precisely this type of unclear and expansive digital imposition that creates uncertainty for businesses and can act as a damper on business development and job creation within the state.
On the nexus front, TRAC recommends a two-pronged attack to compel out-of-state companies to collect sales tax. If adopted, a retailer will be “presumed to be liable for the sales tax . . . if the retailer enters into an agreement with a resident of this State under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an Internet Web site or otherwise, to the retailer.” The recommendations also contain a provision that establishes nexus by expanding the definition of a “retailer maintaining a place of business” in South Carolina to include an out-of-state company if an in-state affiliated entity has a presence in the state and the affiliated entity does any of the following: use “substantially similar name, tradename, trademark, or goodwill, to develop, promote, or maintain sales”; “pay for each other’s services in whole or in part”; “share a common business plan or substantially coordinate their business plans”; or the in-state company “provides services to or on behalf of, or that inure to the benefit of, the out-of-state retailer.” Adding the TRAC nexus provisions to its long-standing economic income tax nexus regime, the TRAC nexus proposal would make South Carolina one of the most aggressive nexus jurisdictions in