Subscription Streaming in the Sales Tax Crosshairs

This blog was last updated on November 1, 2023

As the U.S. economy teeters on a recession and budget shortfalls emerge, states begin searching for ways to expand sales tax revenue. Companies that offer subscription streaming services are increasingly finding themselves the targets of newly proposed taxes and attempts to expand and contort existing taxes to include streaming providers.

What is the current sales tax landscape?

More than a decade ago, states began grappling with the concept of digital equivalents to tangible personal property. The question being, should sales tax be charged on the digital equivalent of something that would be clearly taxed if purchased in tangible form. The classic example being downloaded music versus music purchased on a record, cassette or compact disc. In many states, the answer to that question was a resounding yes, and the rationale is easy to understand. States felt that they needed to adapt their sales tax rules to evolving technology and purchasing habits.

To that end, states adopted definitions for “digital products” and “products transferred electronically,” many of which were aligned to those contained in the Streamlined Sales Tax (SST) Agreement for digital audio works, digital audio-visual works and digital books. SST member states remained free to tax or exempt digital products at their discretion, so long as they provided clear and unambiguous guidance and definitions.

As things stand today, most U.S. states tax digital products. In fact, there are only 16 states that continue to not tax digital products. Included in this list are California, Florida, Illinois, Massachusetts, and New York.

Streaming services – a whole different thing

Streaming content, especially subscription streaming services is where the world is squarely going. Unlike downloaded digital products, where someone acquires one specific thing, with subscription streaming, users gain access to an evolving library of content and retain their access so long as they keep paying for their subscription. According to published reports, the current global market for video streaming sits at $89.03 billion and projects to climb to $416.84 billion by 2030, with the United States representing close to 32% of that total market.

While some states have adapted their sales tax laws to apply to this new form of consuming entertainment, there are 21 states that do not yet extend their tax subscription streaming. Not surprisingly, most of the states that exempt digital products also exempt subscription streaming, but that is not always the case. A couple of years back, West Virginia, a state that does not tax digital products, suddenly began saying that streaming services were taxable because West Virginia taxes all services unless specifically enumerated as non-taxable. Since services are indeed generally taxable in West Virginia, subscription streaming became taxable in West Virginia even though it didn’t change one word of its laws or regulations.

The Utah development

This trend of interpreting existing laws and rules to capture sales by streaming providers has continued in Utah. Utah, unlike West Virginia, taxes specified digital products. But as discussed in multiple Private Letter Rulings, the State Tax Commission never took the position that streaming services were taxable. In fact, Utah passed a bill that would have overly taxed streaming services. The law was repealed before it took effect. Nonetheless, a recent written decision by the Commission, assuming it holds up on appeal, likely makes most streaming providers subject to Utah taxation.

Specifically, Appeal # 22-174 deals with an unnamed subscription streaming provider who also allows subscribers to “download” movies and watch them offline. Based on these circumstances, Utah argued that that since the total subscription charge accounted for both streaming and the download option, then it was fully taxable under the “bundled transaction” rule as downloaded movies constitute a taxable digital product.

A “bundled transaction” is a combination of distinct and identifiable products and/or services offered for a single non-itemized price, at least one of which is taxable. The rule is that bundled transactions are subject to sales tax unless certain exceptions apply:

Exception 1: When taxable property is combined with a non-taxable service the bundle is not taxable when acquiring the property is essential to using the service, the property is provided exclusively to purchasers of the service, and the service represents the “true object” of the sale.

Exception 2: When taxable services are combined with non-taxable services, a rule like the one in Example 1 applies.

Exception 3: When taxable property is combined with non-taxable property, the bundle is not taxable if the purchase price of the taxable property is de-minimis, meaning it represents 10% or less of the total sales price.

Exception 4: A taxable product or service will not be considered “distinct and identifiable” if provided free of charge with the purchase of non-taxable products or services or if the sales price does not vary based on the inclusion of the taxable product or service.

While the written opinion does not specify with clarity which exceptions were argued and considered, it does suggest that the taxpayer was not able to provide that the value of the download was “de-minimus” nor were they able to prove that the download component was offered free of charge, despite the fact that the taxpayer showed that the download service was provided as additional feature to all customers in 2016 without any price increase.

Given that the download option is ubiquitous among streaming providers and considering the high burden placed on the taxpayer in proving that the download option is truly “free of charge,” should this opinion stand, Utah will have effectively imposed its sales tax on streaming service providers without having to pass any legislation.

What’s next?

The taxpayer in this case has the right to continued administrative appeals and they likely will avail themselves of that option, but providers of digital streaming must continually be on the lookout for both new taxes being enacted, or existing taxes being stretched to apply to them.