Jonah Patel
Tangible personal property (TPP) is any item that can be felt or touched and physically relocated. This includes machinery, equipment, vehicles, and collectibles. Most states apply sales tax to sales of TPP and selected services. However, the definition of TPP has evolved over time and continues to change with technological advancements. For example, the Mississippi Supreme Court recently ruled that digital photographs are not considered TPP, even when transferred via tangible media. This highlights the importance of understanding how digital products factor into the definition of TPP in different tax jurisdictions. Businesses can expense the full purchase price of qualifying TPP in the year it is placed in service, and tax exemptions may apply in certain cases, such as for residential energy storage systems equipment in New York.
| Characteristics | Values |
|---|---|
| Definition | Tangible personal property (TPP) is any kind of physical personal property that has a material existence and can be felt, touched, and physically relocated. |
| Examples | Cars, refrigerators, livestock, machinery, equipment, cell phones, computers, collectibles, and jewelry. |
| Tax Implications | Most states apply sales tax to sales of TPP and selected services. TPP taxes are regulated at the state level but levied by local governments and can vary by jurisdiction. Some states don't charge TPP tax or only apply it to specific items or business use cases. |
| Digital Products | The definition of TPP is evolving as technology advances. Some states include certain digital products as taxable TPP, but this varies by jurisdiction. |
| Exemptions | Some items are exempt from TPP taxes, such as clothing, appliances, and furniture for personal use. However, these items may be taxable if used for commercial purposes, such as in hotels or rental units. |
| IRS Considerations | Section 179 of the IRS Code allows businesses to expense the full purchase price of qualifying TPP in the year it is placed in service, providing immediate tax relief. For tax year 2024, the maximum deduction limit is $1,220,000. |
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What You'll Learn
Digital products as tangible personal property
The concept of tangible personal property (TPP) is evolving as technology advances, and digital goods are becoming an important factor in the definition of TPP for tax purposes. TPP traditionally refers to physical items that can be touched, felt, or physically relocated, such as machinery, equipment, and consumer goods. However, with the rise of digital products, the line between tangible and intangible assets is blurring.
Digital goods, also known as digital products or e-goods, are goods that are stored, delivered, and used in an electronic format. Examples include e-books, music files, software, digital images, and manuals. These products are typically downloaded from the internet or received as email attachments. While digital goods do not possess physical attributes, they can still be considered TPP in certain jurisdictions.
The taxation of digital goods varies across different states and countries. Some states in the US have specifically defined digital goods that are subject to sales tax, such as Alabama, which considers digital photographs as tangible property, and Arkansas, which taxes digital audio-visual and audio works under certain conditions. Other states, like Texas, apply sales tax to digital goods if they would be taxable if delivered in physical form. Utah follows a similar approach, taxing any product delivered electronically that would be taxable through other delivery methods.
On the other hand, some states do not classify digital goods as TPP. For instance, Kansas does not tax electronic downloads of digital products, considering them intangible personal property. Similarly, states like California, the District of Columbia, and Florida do not affirmatively tax digital images or digital books due to their lack of physicality. In the European Union, digital products are generally treated as supplies of taxable services, and VAT rates vary depending on the country.
The classification of digital products as TPP has significant implications for businesses and consumers. It determines the applicability of sales tax, which can impact the pricing and affordability of digital goods. As the digital landscape continues to evolve, the definition of TPP will likely continue to adapt, and jurisdictions will need to clarify and update their tax regulations accordingly.
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Taxable services
The term "taxable services" covers a wide range of services that are subject to sales tax. The specific services that are taxable vary by state, and there is no uniformity across the US. For example, five states (Alaska, Delaware, Montana, New Hampshire, and Oregon) do not impose any general sales tax on goods or services. Four states (Hawaii, New Mexico, South Dakota, and West Virginia) tax services by default, with exceptions for those exempted by law. The remaining states do not tax services by default, but specific services may be taxed.
Services to real property involve work done on buildings and land, such as landscaping, lawn care, and janitorial services. Business services are those performed for companies, and they can vary widely. Examples of taxable business services include data processing services, such as using a computer for word processing, data entry, and storage. Amusement services, such as movie theaters, circuses, concerts, and sporting events, are also often taxable.
It is important to note that the taxability of services can be complex and constantly evolving, especially with the advancement of technology. For example, digital products and services may fall under taxable services in some states, but the definitions can vary. Additionally, the taxability of services may depend on the context and how they are delivered in conjunction with goods sold. Consulting official publications and tax bulletins is essential to understand the specific taxable services in each state.
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Exemptions
The definition of tangible personal property has evolved since the inception of sales tax in the 1930s, and it continues to change as technology advances. Tangible personal property, or TPP, includes items that can be touched, felt, or physically relocated, such as machinery, equipment, furniture, cell phones, computers, and collectibles. It does not include real property, which is immovable.
While most states tax business personal property, some provide exemptions for small businesses with minimal tangible personal property. For example, New York has specific exemptions for certain tangible personal property and services. Sales of tangible personal property are generally subject to New York sales tax unless they are specifically exempt. Similarly, sales of services are exempt from New York sales tax unless they are specifically taxable.
In Texas, an organization is entitled to an exemption from taxation of any building or tangible personal property it owns and uses in the administration of its acquisition, building, repair, sale, or rental of property. This exemption is applicable if the property is used exclusively by the organization. Additionally, a person in Texas is entitled to an exemption from taxation of precious metal owned and held in a precious metal depository in the state, regardless of whether it is used for income production.
California also provides exemptions for certain types of tangible personal property. For example, business inventory, such as manufacturing supplies that become part of a product or are the product itself, is exempt from taxation. Aircraft on consignment held for sale by a licensed dealer on January 1 also qualify for the business inventory exemption and are not subject to property taxes.
Furthermore, some states exempt digital products from tangible personal property taxes. These states include California, Florida, Georgia, Illinois, Kansas, Massachusetts, Michigan, Missouri, North Dakota, Nevada, New York, Oklahoma, Virginia, and West Virginia.
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Intangible assets
The distinction between tangible and intangible assets is important when it comes to taxation. Most states in the US apply sales tax to tangible personal property and selected services. However, the definition of tangible personal property has evolved significantly since the inception of sales tax in the 1930s, and it continues to change as technology advances. For example, a recent court case in Mississippi highlighted that digital photographs were not considered tangible personal property, even when transferred via tangible media.
The value of intangible assets can be difficult to ascertain, and they are generally considered long-term assets that can increase in value over time. Businesses can create or acquire intangible assets, such as by developing a brand name or purchasing a patent. Intangible assets with identifiable useful lives, such as copyrights and patents, are amortized over their economic or legal life. Intangible assets with indefinite useful lives, such as trademarks and goodwill, are reassessed each year for impairment.
From an accounting perspective, the International Accounting Standards Board (IASB) provides guidance on how intangible assets should be accounted for in financial statements. Under US GAAP, intangible assets are classified as either purchased or internally created, and as limited-life or indefinite-life. The capitalized costs of "section 197 intangibles", which are intangible assets with indefinite useful lives, must be amortized over 15 years if they are acquired for use in a trade or business.
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TPP depreciation
Tangible personal property, or TPP, is personal property that can be felt or touched and physically relocated. TPP includes items such as furniture, machinery, cell phones, computers, and collectibles. It does not include real property, as real property is immovable.
TPP is depreciated over its useful life. The IRS provides guidelines for different classes of property under the Modified Accelerated Cost Recovery System (MACRS). This system outlines specific depreciation methods and recovery periods depending on the type of asset. For example, computers, office equipment, cars, and trucks are considered 5-year property, while office furniture and fixtures are considered 7-year property. The most commonly used depreciation methods under MACRS are the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). GDS usually provides faster depreciation with methods like the double-declining balance, while ADS offers a longer recovery period with a straight-line method.
Section 179 of the IRS Code allows businesses to expense the full purchase price of qualifying TPP in the year it is placed in service, rather than capitalizing and depreciating it over time. This provision is designed to encourage businesses to invest in new equipment by providing immediate tax relief. To qualify for Section 179 expensing, the TPP must be acquired for use in a trade or business, newly purchased, and placed in service during the tax year. Bonus depreciation allows businesses to deduct a significant percentage of the cost of qualifying property in the year it is placed in service.
The taxation of TPP varies across states and jurisdictions. Some states do not levy TPP taxes at all, while others may only apply a tax on TPP in the year the property was purchased. Additionally, certain items may be exempt from TPP taxes, such as items used for personal or household purposes rather than commercial purposes. Understanding the specific rules and exemptions applicable to each jurisdiction is important for tax planning and compliance.
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Frequently asked questions
Tangible personal property (TPP) is any item that can be felt or touched and physically relocated. This includes items such as cars, refrigerators, cell phones, and jewelry.
Servicing of TPP includes the storing, maintaining, repairing, and installing of the property. For example, the service of installing residential energy storage systems equipment is considered servicing TPP.
It depends on the taxing jurisdiction. In some states, digital products such as computer software are considered TPP, while in others, they are not. For example, in Mississippi, digital still photographs are not considered TPP.
Yes, certain items may be exempt from sales tax depending on the jurisdiction. For example, in New York, receipts from the retail sales of residential energy storage systems equipment are exempt from state and local sales and use taxes.
The taxation of TPP varies by jurisdiction. Some states do not impose TPP taxes, while others may only apply it to certain items or use it for business purposes. TPP taxes are typically regulated at the state level but levied by local governments.
