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Peloton Lawsuit Demonstrates Importance of Product Taxability

by TaxJar October 4, 2021

For many people, Peloton’s at-home fitness classes have been a lifeline during a pandemic, when it’s been dangerous to gather in large groups. But a sales tax snafu recently landed the fitness company, which sells not only at-home stationary bicycles but fitness classes for a monthly subscription fee, in hot water. 

What’s the deal with the Peloton sales tax lawsuit? 

According to Reuters, “In a complaint filed on Thursday night in federal court in Manhattan, [plaintiffs] Brandon Skillern and Ryan Corken said Peloton should have treated its $39-a-month ‘All Access’ and $12.99-a-month digital memberships as tax-exempt ‘digital goods’ in the three states.” 

In layperson’s terms, the suit alleges that Peloton charged sales tax on a service, “digital goods,” that is not subject to sales tax in the states of Massachusetts, New York and Virginia. 

Unfortunately, not understanding the difference between taxable and non-taxable products and services is incredibly common, even for high-volume businesses. And once you understand the complicated logic behind sales tax in the US, it isn’t hard to understand why businesses get confused.  Let’s dig into why.

Why are digital goods taxable in some states but not in others? 

In the US, sales tax is governed at the state level and each state is allowed to create their own sales tax rules and laws. However, most sales tax codes are based on laws written starting in the 1930s, well before concepts like e-commerce or online fitness class subscriptions were even a glimmer in the most fanciful science fiction writer’s eye.

Further, the sales tax was originally intended to be applied to “tangible personal property,” i.e. things you can touch and feel, like a dishwasher or a hairbrush. In most states, most services weren’t (and still aren’t) taxable. 

And if you follow politics at all, you’ll notice that laws often struggle to catch up to the realities of the day. And that includes state sales tax laws about “new” concepts like selling products online between states or selling “digital” goods like eBooks, entertainment subscription services and yes, things like online fitness classes. 

Constantly evolving technology, the slow pace of the law, and the fact that the US has forty-six different states (plus DC) that make their own sales tax rules and laws have led to a whole lot of confusion to business owners who just want to sell a product or service. 

As it stands today, many states have either clarified that digital goods are taxable or non-taxable, or haven’t taken a stance either way yet. The states who haven’t clarified their stance have basically left it up to individual companies, their accountants and lawyers to interpret existing laws (which very well may have been written with mail order companies in mind) as to whether digital goods are taxable. 

Ever evolving technology has also led states to ask questions like: “An eBook is a digital version of a taxable paper book, so should the digital version of a taxable product be taxable?” 

And each state has come to their own conclusions on that question and many more questions around streaming services or online classes or any number of other things that we now partake in digitally. 

How do I know I’m charging sales tax correctly? 

Online retailers just want to sell a product or service, not tangle with sales tax collectors in forty-six states (and DC!) So how do you know you are charging sales tax correctly? 

We’ve put together a guide to states in which digital products are taxable and non-taxable. However, the guide is general and for informational purposes only. And that’s because each state taxes digital goods slightly differently. For example, some states distinguish between digital property sold and downloaded for a buyer to use forever versus digital property “borrowed” such as a digitally rented movie. Other states say that online fitness classes taught by a live instructor are taxed differently from pre-recorded online classes.

That’s why we recommend consulting with a vetted sales tax expert in order to determine how your products are taxed in each of your nexus states.

And last but not least, TaxJar has you covered. With the TaxJar API, simply label each of your products or services with the right product tax code (we have thousands, including codes for digital goods, online classes and more) and we’ll make sure you collect (or don’t collect) the right amount of sales tax on that item from every buyer, every time. This means that you won’t run into the issue that Peloton faces, of accidentally collecting sales tax from buyers in a state where their service wasn’t actually taxable. 

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