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Recent advances in technology have enabled us to deliver lots of useful “digital products” over the Internet that weren’t possible just a decade or two ago.

Local governments seeking to get a piece of the action haven’t kept up, so taxing authorities have had to undergo serious mental gymnastics to characterize digital products such as streaming video in a way that can be dealt with by their tax regime.

Alabama, for example, has a sales and use tax that applies to sales of tangible personal property but not services. However, it does apply to rents. So the Alabama Department of Revenue, having acknowledged that sales of digital goods are not taxable, has decided to go after streaming video in creative way.

In June, the department published a regulation saying that streaming video was a rental, and that the rental tax would be applied whenever the customer had an Alabama service address. That act attracted a firestorm of opposition from business advocates and state legislators, and one month later the department withdrew the regulation. No definitive word yet on the outcome.

Idaho amended its law effective last April to provide that streaming services are not subject to sales and use tax. Although sales of digital goods are taxable, the tax doesn’t apply to streaming because the use is temporary and there is no permanence to the purchased product. Well, you permanently part with the money, but you don’t receive downloaded software. So the result in Idaho seems to be the opposite of Alabama.

In New York, the State Department of Taxation and Finance recently published an advisory opinion dealing with video game software and online gaming. A taxpayer had inquired about payments to access the network, payments to download the game client, payments for “point cards” to enhance play or buy in-game items, and dollar value cards that can be redeemed online.

New York tax law imposes sales and use tax on retail sales of tangible personal property, and specifically includes prewritten computer software regardless of how it is delivered. So the department had no trouble concluding that sales of software and game content were both taxable. The only wrinkle was the dollar value cards, which like gift certificates would not be taxable when sold, but when redeemed.

In Hawaii, we don’t have laws that apply specifically to digital products, but our General Excise Tax hits virtually every economic activity imaginable so the Hawaii result probably would be pretty close to the outcome in New York.

The more interesting question for us is how the activity would be characterized, because the rules for tangible property are different from those for services, and if digital content is none of the above, such as a rental or royalty, then there is yet another set of rules.

With different precedents coming out of different states and little or no guidance from our Department of Taxation, well-meaning taxpayers may get confused, and taxpayers who play it close to the edge will use the precedents in their favor to justify whatever position they want to take.

The state owes it to our taxpayers to take the more common scenarios, analyze them, and publish the results so that people understand what the government expects of them. Some resources spent on providing front-end guidance can save everyone lots of time, money and headaches in back-end activities such as audits and collection activity.