Taxing the Coronavirus Economy: Arkansas DFA Opines that Disinfecting Services and Videoconferencing Are Taxable

Recent weeks have seen a high volume of Arkansas Department of Finance and Administration (DFA) legal opinions and hearing decisions being published. This includes a pair of opinions regarding sales tax on services in high demand during the coronavirus epidemic: disinfecting / deep cleaning and videoconferencing. DFA Revenue Legal Counsel has advised that both are taxable, as cleaning and janitorial services and telecommunications services respectively.

Legal opinion 20200327 (Jun. 11, 2020) advises that coronavirus cleaning and disinfecting services are subject to Arkansas sales and use tax. Among other services, Arkansas taxes the service of providing cleaning or janitorial work. Ark. Code Ann. § 26-52-301(3)(D)(i)(b). Rule GR-9.4(A) defines cleaning services as "services to rid the interior or exterior of any building, dwelling, or other structure of dirt, impurities, or extraneous matter." The legal opinion concluded that both wiping surfaces and using a disinfectant fogger came within this definition of a taxable cleaning service. The opinion declined to extend an exclusion from tax for USDA-required food facility sanitization (Rule GR-9.4(E)) to also apply to services covered under the CDC's coronavirus cleaning and disinfecting guidance.

Legal opinion 20191230 (June 11, 2020) advises that online videoconferencing services are taxable telecommunication services. Arkansas, as a Streamlined Sales Tax state, defines telecommunications as "the electronic transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals to a point or between or among points," and the term "includes the transmission, conveyance, or routing in which computer processing applications are used to act on the form, code, or protocol of the content for purposes of transmission, conveyance, or routing...." Ark. Code Ann. § 26-52-315(e)(19)(A), (B). The opinion reasons that providing "audio, video, and recording capabilities for users in different locations via the internet" constitutes a taxable "online telecommunications service."

Looking at my own videoconference provider's invoices, they have been charging sales tax such that this may not be a significant development in terms of immediate financial impact. Classification of videoconferencing for sales tax purposes seems to be a gray area, with other states having classified similar services variously as the ancillary telecom service of conference bridging (which Arkansas also would tax) or the remote license of software (which Arkansas would not tax). Given that Opinion 20191230 is interpreting a Streamlined definition, it may raise risks of taxation of videoconferencing services as telecommunication services in other states.

In addition, Opinion 20191230 raises concerns about a slippery slope in treating online services with an interpersonal communication aspect as taxable telecommunication services in Arkansas. In general, telecommunications has been taxed based on the actual transmission of voice or data (with an exception for internet access as required under the Internet Tax Freedom Act), and services provided over the internet have not been taxed since they are not providing the actual linkage. Online videoconferencing has similarities to other kinds of software as a service, and so this opinion is potentially concerning as its reasoning could be extended more broadly. For example, query whether an office productivity suite that includes team messaging and internal conferencing would also be taxable. Since this opinion was requested by a customer and not by the videoconferencing service itself, it did not delve into the actual online architecture of the service, which would seem to be relevant to determining whether it was within the definition of a telecommunications service. 

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