A proposed class action lawsuit against Peloton Interactive, Inc. ( “Peloton” ) was recently announced alleging Peloton intentionally and erroneously collected sales tax from customers in Massachusetts, New York and Virginia. Peloton is known for their stationary bicycles and treadmills used for home fitness. Peloton also sells subscriptions to their collection of home fitness classes. Peloton reportedly stopped collecting tax on memberships in these states beginning January 1, 2021, but the complaint filed alleges that “millions of dollars nationwide may have been collected.
Peloton’s experience highlights the challenge sellers face in determining whether their products are subject to sales tax when they are provided in an intangible format. Using Peloton as an example, there are several possible ways their services might be taxed in a state. A few examples of ways a state might view Peloton’s membership subscription fees are as a digital good, electronically accessed software, telecommunications service, or an admission to a place of amusement. The states tax or exempt each of these services differently. An added complexity, especially related to digital goods and software, is that state laws change frequently in this area as the states try to keep up with changes in the economy and how products are sold.
Businesses that provide access to streaming videos, live streamed classes, and digital products such as books, pamphlets, and music should consider whether these offerings create a sales tax collection requirement. Further, if these items are offered in combination with other products or services, the business should consider potential bundling rules as well, which creates additional tax complications.
Let Clarus Partners help you navigate these complexities so that your business doesn’t find itself in a similar situation as Peloton.
By Nic Schatte