It’s important to pay attention when big companies are in the tax news.
Tax offices like to hunt whales when they want to set a new precedent. Any time you see ‘State X vs. Big Co’ in the media, you can rest assured a big tax reform is coming (and it will benefit the state).
The tax nerds among us won’t need to be reminded of South Dakota v. Wayfair, Inc. in 2018, and these same fiscal fundi’s have their eyes fixed on Peloton and Airbnb’s current sales tax woes.
Peloton persuades U.S. judge to send sales tax lawsuit into arbitration
In early September 2022, a U.S. judge handed a victory to Peloton by declaring that their sales tax case does not belong in federal court. Peloton were being sued by a bunch of subscribers who claimed they had not charged sales tax correctly. Sales tax is not governed federally, so it was kicked out of federal court, and the claims will need to be pursued in the relevant states.
As reported, by CNBC, the plaintiffs contended that New York-based Peloton should have treated its $39-a-month “All Access” and $12.99-a-month digital memberships as tax-exempt “digital goods” instead of charging sales tax between 6.3% and 8.9%. They accuse Peloton of having collected millions of dollars improperly nationwide.
This decision highlights 2 key takeaways:
- States have very clear control over their own sales tax rules.
- The federal government refused to rule on a case of exempting digital products – which is a clear indication that many states will look to make more digital products eligible for sales tax.
Expedia, Airbnb Must Collect Virginia Sales Tax
Towards the end of August 2022, Bloomberg Tax broke the news that the state of Virginia had updated its tax legislation for the purpose of imposing taxes on accommodation intermediaries like Airbnb and Expedia.
Previously, only the underlying provider of the accommodation was required to charge sales tax, but now the intermediary must do so as well.
For example, assume I put my Virginia house on Airbnb for $100 a night and assume that Airbnb charges 10% commission.
The guest would be quoted $110 in that case, but Virginia imposes a sales tax on retail accommodations. Under the old rules, the $100 charged by the “provider” (i.e. the owner of the property) would be subject to sales tax, but the $10 commission made by the middle man was exempt.
Following the recent law change, the middle man (called “accommodations intermediaries” in the new code) is also going to be obliged to charge sales tax.
This is bad news for travelers, who will have to pay more now (unless the likes of Airbnb reduces their share of the revenue to “swallow” the tax for guests), but it’s great news for the state of Virginia – who will effectively be able to get 6% tax on most of Airbnb’s revenue… going back to 2021!