As states modernize their rules for digital goods and services, one issue seems to keep resurfacing: bundled transactions, in which a single sale includes a mix of taxable and nontaxable products, such as streaming services paired with digital downloads or other promotional items.
The state tax treatment of these bundles is often murky. And in many cases, sellers get to decide unilaterally and with no transparency on how the transaction should be taxed.
States looking to adopt digital product bundling should begin with a simple consumer-facing transparency rule: If a seller can bundle it, they can explain it to consumers. Before getting lost in “true object” tests, de minimis thresholds, and whether a bobblehead is incidental to a music subscription, states should focus on simple consumer transparency.
Current tax rules have loopholes that sellers can exploit. For instance, under the Streamlined Sales Tax Agreement, a sale isn’t a bundled transaction subject to taxation if the seller provides a price list showing separate values for each item. So, a $20 streaming bundle can be labeled as $19 for nontaxable services and $1 for a taxable product—even if that taxable product would sell for significantly more in a non-bundle context.
But sellers bundling taxable products should be explicitly required at the point of sale to disclose what is in a digital package, how components are priced for purposes of the bundle, and what is and isn’t taxable. Requiring clear invoicing enforces accountability, makes auditing more efficient, and clarifies rules for consumers.
The Multistate Tax Commission’s recent recommendations recognize the messiness of digital bundles but stops short of calling for this kind of proactive customer-facing reform. And although clarifying definitions and refining exclusions are helpful, disclosure shouldn’t be a courtesy—it’s the price of tax deferral in the bundling game.
—Andrew Leahey
Welcome to the Week in Insights for Bloomberg Tax’s latest analysis and news commentary. This week, experts examined energy tax credit transfer agreements, tariff policies’ effects on state indirect taxes, and more.
The Exchange—It’s where great ideas on tax and accounting intersect.
Insights
Don’t Overlook the Impact of Tariffs on State Indirect Taxes
Forvis Mazars’ Josh Howell says businesses need a better understanding of the ins and outs of import tariffs to avoid overpaying taxes.
Tax Advisers Can Ease ‘Great Wealth Transfer’ Despite Unknowns
Wilmington Trust’s Lisa Roberts says tax advisers can help clients secure their future by focusing on consolidating wealth, integrating technology, and aligning investment strategies with their clients’ values.
US Auditors Risk Losing to AI by Ignoring Sustainability Data
Eric Israel examines why the auditing profession in the US is ill-prepared to handle the rise of artificial intelligence models and EU sustainability reporting requirements.
‘America Last’ Corporate Tax Policies Can End With This Congress
FACT Coalition’s Zorka Milin says Congress should raise certain global tax rates that were part of the soon-expiring Tax Cuts and Jobs Act to generate hundreds of billions of dollars in additional revenue.
Energy Tax Credit Deals Need to Account for Trump Uncertainty
Steptoe attorneys say buyers and sellers of energy tax credits should monitor legislative and regulatory changes closely to ensure transfer agreements protect against changes in the law.
Creating Tariff Strategies? Get the Tax Department to Weigh In
Forvis Mazars’ Michael Cornett explains why multinational enterprises should involve their tax departments and advisers when developing tariff strategies.
Complex Wage Rules Make Energy Tax Credits Ripe for IRS Audits
Cherry Bekaert experts say businesses seeking energy tax credits must prepare for potential audits by accurately documenting labor classifications and training both managers and personnel on the complicated rules.
Justices Parse Bankruptcy Code and State Law in IRS Clawback Case
Baker Donelson’s Laura Walker Plunkett examines the Supreme Court’s decision to reject a bankruptcy trustee’s bid to use a state fraudulent transfer law to force the IRS to return $145,000 in misappropriated funds.
A Crypto Payroll Comes With Legal Barriers and Financial Risks
Wilson Elser’s Luis Ayala explains the growing interest in cryptocurrency compensation packages and what it could mean for the future of payroll processing.
UK Government Faces Tough Balancing Act on Digital Services Tax
RPC’s Adam Craggs and Liam McKay look at the UK government’s options for adapting the Digital Services Tax as a response to rapidly changing trade dynamics with the US.
Brazil’s 10-Year Tax Transition Makes Business Agility a Must
Meta’s Rafael Benevides says Brazil’s tax reform plan, which will replace current taxes with new taxes over the next decade, will require businesses to adapt pricing strategies and manage cash flow carefully.
Columnist Corner
Eliminating the step-up basis for capital gains would help seal a major tax revenue leak that “essentially bakes structural inequity into the tax code,” Andrew Leahey writes in his latest Technically Speaking column.
“Buy, save, die” is a more impactful practice than the “buy, borrow, die,” tactics that have made headlines, Andrew says. He argues that taxing gains upon death is an administratively feasible solution that would turn deferred capital gains into realized ones on a generational cycle. Read More
News Roundup
IRS Head, Privacy Chief to Quit After Immigration Data Deal
The acting IRS commissioner and the agency’s privacy chief are leaving their posts on the heels of a clash over a data-sharing agreement that helps the Trump administration’s immigration effort, according to a person familiar with the matter.
IRS Pick Billy Long Filing Shows Ties to Dubious Tax Credits
New ethics filings reveal connections between IRS commissioner-pick Billy Long and companies promoting a pandemic-era credit associated with fraud and tribal tax credits the Treasury Department has said is not authorized by law or regulation.
Trump Has Legitimate Grievance With Digital Levies, Tax Pros Say
Industry groups and tax professionals are echoing US President Donald Trump’s view that the digital services taxes implemented by a number of countries target mostly American tech companies.
States Weigh NIL Tax Breaks to Attract Top College Athletes
This year’s Final Four in the men’s NCAA Basketball Tournament had more in common than being No. 1 seeds: Their home states either already give student athletes a tax break on earnings from endorsements and marketing tied to their personal brands, or are trying to enact one.
Tax Management International Journal
TP, Financial Reporting Differ on Acquired Intangibles
Grant Thornton practitioners discuss the significant differences between valuations for transfer pricing versus financial reporting purposes in the treatment of synergies and goodwill, enforcement, etc. and how executives can best approach these differences to mitigate risks.
Tax Management Memorandum
Will Looming Decision Clarify the Limited Partner Exception?
A Deloitte Tax practitioner analyzes the most recent net earnings from self-employment tax cases and describes why there may be different standards in place depending on where the taxpayer is located.
Career Moves
Angharad Lynn joined Russell-Cooke as a partner in its private client practice.
Oliver Currall joined Fried Frank as a partner in its tax department in London.
Cameron Cosby joined Sullivan & Worcester as a partner in its REITs and tax practices in Washington.
If you’re changing jobs or being promoted, send your submission to TaxMoves@bloombergindustry.com for consideration.
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