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Sales Tax State Activity Update - June 2008

Special Delivery ~ New York Declares Internet Video Exempt

The issue raised by the Taxpayer in a Petition for Advisory Opinion, is whether the sale of a video delivered electronically over the Internet is subject to sales and use tax. The video was determined an intangible and therefore not subject to sale and use tax.

Facts

The Petitioner provides various services over the Internet, including providing access to videos from a variety of content providers delivered over the Internet. The content provider for the video will either establish a fee for the video or the video may be provided free. Customers using this service must have access to the Internet but do not need any special or additional software. When customers go to the Petitioner's Web site they use one of the following methods to select a video.

1. Download Video to Personal Computer (PC), Connected: A customer may choose a video to be downloaded to a PC or other device to be viewed while connected to the Internet. In this case, the content provider requires the customer to be connected to the Internet to watch the downloaded video to enable digital rights management which is a method the content owner uses to protect the contents of the video from being pirated. When a customer purchases a video, the customer pays the fee at the Petitioner's checkout service and may then download the video to a computer or other device.
   
   Each time the customer watches the video, he or she must connect to the Internet where the Petitioner verifies the customer's identity and enables the customer to watch the video. Although the customer remains connected to the Internet while viewing the downloaded video, the customer still has the ability to choose when and how many times to view the video, and the customer has options available such as fast forwarding, rewinding, and pausing the video. Generally, for a customer to view a free video, the computer does not need to be connected to the Internet, but there are some exceptions.
   
   
2. Download Video to PC, Disconnected: A customer may choose a video to be downloaded to a PC or other device to be viewed offline. When the customer purchases a video, the customer pays the fee at the Petitioner's checkout service and may then download the video to his or her computer or other device. The customer may then watch the video at any time without being connected to the Internet.

Opinion

While receipts from the sale of prewritten software delivered electronically are subject to sales tax pursuant to sections 1101(b) (6) and 1105(a) of the Tax Law, sales of music and photographs delivered electronically are not considered to be sales of software. In the same way that audio content (music) and visual content (photographs) delivered electronically are intangible property not subject to sales tax, receipts from the sale of videos delivered to customers electronically via the Internet and downloaded to the customer's computer or other device are receipts from the sale of intangibles and are not subject to sales or compensating use tax under section 1105(a) or 1110(a) (A) of the Tax Law.

The full opinion can be viewed on New York State Department of Taxation & Finance Website. (PDF)

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