Sales Tax State Activity Update - November 2008

Cornhusker State Shucks Tax Free Digital Media Downloads

Beginning October 1, 2008, retail sales of digital audio works (music), digital audio-visual works (movies, music videos, TV shows), and digital books are subject to tax when delivered electronically if the products are taxable when delivered on tangible storage media. Also, retail sales of digital codes that provide the purchaser with a right to obtain digital audio works, digital audio-visual works, or digital books are subject to tax. Sales of such digital products are subject to tax when the purchaser receives a permanent right of use, a right of use which terminates on some condition, and a right of use conditioned upon continued payments.

Examples
An on-line retailer of music sells music files for a set price per song or album. The purchaser receives the music through its Internet connection and is allowed to keep the song(s) permanently on an electronic storage device. These sales are subject to tax as digital audio works.

An on-line retailer of movies and TV shows allows purchasers to view selected shows for only a 24 hour period. The purchaser receives the show through its Internet connection and views the show on an HD television or computer. Purchasers have 30 days to start watching the show and once it starts, will have 24 hours to finish it or play it as many times as desired during the 24 hour period. These sales are subject to tax as digital audio-visual works even though the retailer does not authorize the purchaser to permanently retain the movie or show.

An on-line retailer of books sells subscriptions to a book club that provides purchasers with electronic book deliveries on a monthly basis. The electronic books are received by the purchaser through an Internet connection and stored on a computer hard drive. Such products constitute digital books and the monthly charges are subject to tax even though the purchaser’s right of use is conditioned upon continued payments.

Digital Code
The sale of a digital code is a taxable event even though the purchaser may exercise the digital code to take electronic delivery of the digital product at a later date. A code that represents a stored monetary value that is deducted from a total as it is used by the purchaser is not a digital code. In addition, a redeemable card, gift card, or gift certificate that entitles the holder to select digital products of an indicated value is not a digital code.

This Revenue Ruling may be viewed at the Nebraska Department of Revenue Web site.
(Nebraska Department of Revenue, Revenue Ruling 01-08-03, 8/25/08)

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