Sales and Use Taxes in a Digital Economy

By Jennifer Jensen, CPA, Alesia Lewis, CPA, and Adam DoVale, J.D., LL.M.

Editor: Sarah McGahan, J.D., LL.M.

Today's technologies are constantly changing at an ever-increasing speed. What was new a year ago is old today. Newer gadgets and capabilities are entering the market every day. People and companies are demanding more and more in the way of innovation. Movies, once only viewable on television or in a movie theater, are now readily available for streaming from online providers anywhere consumers have access to the internet and a mobile device. Items historically purchased or rented at a fixed store location are now just the click of a mouse away. Payments can be made without using traditional currency (and this does not just refer to credit card or electronic payments). Businesses rely on cloud providers to provide IT support and perform back-office functions in lieu of purchasing and maintaining their own infrastructures.

While consumers and businesses reap the benefits of faster, better, more efficient technology, state tax departments continue to struggle to provide timely guidance on the potential sales and use tax implications of modern technological offerings. As a result, providers of digital offerings may see different tax treatments and classifications from state to state depending on a variety of factors. This column highlights the complexities of taxing digital products through the example of streaming content, discusses the increasing use of digital currencies and how states have begun to react, addresses the challenges of determining what is a true service and what is a license of technology, and looks to the horizon and upcoming trends.

Varying Tax Treatments

The U.S. consumer is no stranger to being entertained by the movie and television industries; the streaming of movies and television content is the perfect example of industries being transformed by technology. Gone are the days of DVDs and VHS tapes. Rather, modern viewers stream popular movies and favorite shows from online providers, and the trend is expected not only to continue but also to grow. One recent study suggests that global electronic home video revenue will exceed physical home video revenue by 2018. 1 The sales and use tax treatment is simple when a movie on a tangible DVD or VHS cassette is purchased. However, tax determinations are much more challenging in today's digital society and can change from state to state depending on the state's definitions of various products and services.

Digital goods provide a good example. "Digital goods" are generally defined as goods that are stored, delivered, and used in electronic format. 2 Arizona's sales and use tax laws do not define a "digital good" or "digital service" but do define "tangible personal property" rather expansively. That definition includes personal property that may be "seen, weighed, measured, felt or touched or is in any other manner perceptible to the senses." 3 The state has not provided any additional clarifying guidance but has taken the position that Arizona's broad definition of tangible personal property allows the state to impose tax on items delivered electronically. 4 As such, Arizona treats the sale of a streaming video service as a taxable sale of tangible personal property.

Similar to Arizona, Texas sales and use tax laws do not define "digital good" or "digital service," and they also broadly define "tangible personal property" to include "property that can be seen, weighed, measured, felt, or touched or that is perceptible to the senses in any other manner . . ." 5 Consequently, Texas taxes the sale of electronically delivered offerings as sales of tangible personal property. 6 However, for streaming video, the state has issued a letter ruling treating an annual subscription fee that allows members to view instant (streamed) videos as a taxable sale of a cable television service. 7 Though the sales tax result is the same for either classification in Texas, in another state, the tax result may not be the same if the state taxes digital goods and streaming content differently.

In a final example, Florida does not define "digital goods" or "digital services" specifically. However, in a Technical Assistance Advisement, the Department of Revenue determined that the portion of a fee for a membership program that provides a streaming video service to its subscribers is subject to Florida communications services tax, rather than sales and use tax. 8 Florida broadly defines communication services as

transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals, including video services, to a point, or between or among points, by or through any electronic, radio, satellite, cable, optical, microwave, or other medium or method now in existence or hereafter devised, regardless of the protocol used for such transmission or conveyance . . . [Emphasis added.] 9

Further, video services are defined as

the transmission of video, audio, or other programming service to a purchaser, and the purchaser interaction, if any, required for the selection or use of a programming service, regardless of whether the programming is transmitted over facilities owned or operated by the video service provider or over facilities owned or operated by another dealer of communications services. . . . The term includes basic, extended, premium, pay-per-view, digital video, two-way cable, and music services. 10

This example illustrates how the same service—streaming video—can be taxed either as tangible personal property, services, or communications services, depending on the state. Unfortunately, this is just one example. Businesses providing online goods and services deal with this complexity for all of their products and services without a hint of clarity in sight.

Digital Currency

Digital currency is not exactly a new concept. However, unlike streaming videos, digital currency is a far less commonly used digital product. An increasing number of businesses now accept digital currency when selling their goods and services. Over the years, several kinds of virtual currencies have gained public attention (e.g., bitcoin, litecoin, dogecoin, peercoin) and, more recently, the attention of state revenue departments.

What is digital currency? Digital currency is a form of currency that is created by software and is stored electronically. Consumers use electronic wallets to pay using digital currency. Treasury defines virtual currency as "a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency." According to Notice 2014-21, while real paper money and coins are legal tender, virtual currency does not have a legal tender status in any jurisdiction. Further, the notice clarifies that for federal tax purposes, virtual currency is treated as property. 11

A handful of states have also issued guidance on the taxability of digital currency. Some states, for instance, address whether the sale of virtual currency itself is subject to sales tax. In a private letter ruling, Missouri explained that bitcoin purchased through an ATM is not subject to Missouri sales tax because bitcoin is intangible property. 12 Only tangible personal property is subject to sales tax in Missouri. In an administrative release, Nebraska addressed the taxability of currency or bullion (such as bars or ingots) as exempt from sales tax. 13 However, the release further specified that bitcoin or virtual currency is not included in the definition of currency. Nebraska did not elaborate on whether bitcoin should be subject to sales tax or treated as consideration. In a news release for tax practitioners, Wisconsin explained that a purchase of virtual currency is not subject to sales tax because the virtual currency represents an intangible right. 14

Other states discuss how sales tax applies to a transaction paid for using virtual currency. A California special notice warned businesses and individuals who accept digital currency as a payment method that those transactions are subject to California sales tax in the same manner they would have been if a traditional payment method were used. 15 Specifically, in California the measure of tax in a transaction paid for in virtual currency is the total amount required for the retailer to sell the product or service, usually the advertised selling price. The notice advises businesses to maintain documentation on the amount for which they normally sell their products or offerings to support the amount of tax remitted.

In an administrative notice, Kentucky explained that for sales and use tax purposes, bitcoin is treated as "consideration," and businesses that accept virtual currency must convert the sales price to U.S. dollars and charge Kentucky sales and use tax on the consideration, expressed in U.S. dollars. 16In an administrative release, Washington explains that for business and occupation (B&O) tax and for sales tax purposes, tax applies to tangible personal property, digital products, or services provided in exchange for virtual currency in the same manner as it would in exchange for consideration. 17 Further, acceptance of virtual currency does not affect the tax classification of the transaction for B&O tax purposes. Similar to California and Washington, in Wisconsin when virtual currency is used to purchase a taxable product, the tax is computed on the value of the consideration received by the seller, measured in U.S. dollars on the date that the virtual currency is received. 18

Though states seem to be more or less consistent in their approach to bitcoin and similar digital currencies, there is still quite a bit of ambiguity around other "currencies" or point systems. Many online video games have their own currencies or point systems that allow consumers to purchase additional levels or game attributes. While these points are often earned through game play, in some instances, payers can use U.S. dollars or real currency to purchase game currency or points. The question becomes whether the purchase of games, attributes, or other digital goods using points earned versus points purchased will affect the taxability of the transactions.

True Object

In addition to the challenges around new online technologies and digital currency, many businesses and states struggle to address who is the consumer of the online platforms and software: the service provider or the customer? Since much of the guidance in this industry is through rulings and cases and not through statute and regulations, businesses are often left to their own judgment as to whether something has crossed the line from a true service to an online digital product or software as a service. Many of the rulings and cases hinge on the control or ultimate possession of the platform. This is where judgment comes into play.

A perfect example of this challenge for businesses is the differing conclusions reached by various states in several recent rulings that addressed a cloud collab­oration service used to administer office telecommunications systems. Since the facts in the rulings are almost identical, these rulings highlight how different states can look at the same transaction and tax it differently by deciding who is controlling the underlying software. In the past, many businesses used their own hardware and software to properly process and route calls within their businesses. However, as illustrated by these rulings, many businesses are now outsourcing this administrative function to cloud-based collaboration service providers. In this model, the company does not own any hardware or software but rather hires a provider to handle the function remotely.

The question for many taxpayers using a cloud-based collaboration service to fulfill their telecommunication needs is how state sales and use tax laws apply to the sale of these services. Similar to streaming video services, cloud-based collaboration services "enjoy" a variety of interpretations among states. For example, Colorado took the stance that these services were not leases or licenses of hardware and software to clients, but rather constituted taxable intrastate telecommunication services taxable when provided to customers located in Colorado. 19

Georgia, however, concluded that the cloud-based collaboration services were not taxable because the taxpayer did not hold a certificate of authority from the Georgia Public Service Commission or sell local exchange or cellular telephone service. 20In addition, the services were not taxable as sales of tangible personal property (such as software as a service that is taxable as tangible personal property in many states) because the customers did not gain title, possession, or control of the software or hardware. 21

Finally, Utah considered the sale of cloud-based collaboration services to be taxable as retail sales of prewritten computer software, which in turn is taxable as tangible personal property. 22 The ruling further elaborated that the object of the transaction in the cloud-based collaboration services model was use of the prewritten computer software to support the telecommunications equipment. 23 Further, the ruling explained that the offering was not a telecommunications service. 24 In each ruling, the states made their determinations by considering who controlled the cloud collaboration platform.

The Horizon

As demonstrated above, the exponential growth of the digital economy creates challenges and uncertainties for consumers, businesses, and tax agencies alike, especially when trying to apply "old laws" to new and novel products and services. In the midst of all this, change appears to be the only constant.


1 PwC, "Global Entertainment and Media Outlook 2014–2018." 

2 Webopedia definition of "digital goods."

3 Ariz. Rev. Stat. §42-5001.17.

4 See Ariz. Admin Code §15-5-154(B).

5 Tex. Tax Code §151.009.

6 See Tex. Tax Code §151.0031; Tex. Admin. Code tit. 34, §3.308(b).

7 Texas Comptroller of Public Accounts, Letter No. 201207532L (July 31, 2012).

8 Florida Dep't of Rev., Technical Assistance Advisement No. 14A-010 (April 7, 2014).

9 Fla. Stat. §202.11(1).

10 Fla. Stat. §202.11(24).

11 Notice 2014-21.

12 Missouri Dep't of Rev., Private Letter Ruling No. LR 7411 (Sept. 2, 2014).

13 Nebraska Dep't of Rev., "Frequently Asked Questions About Currency and Bullion."

14 Wisconsin Dep't of Rev., News for Tax Professionals (March 28, 2014).

15 California State Bd. of Equalization, Special Tax Notice No. L-382 (June 1, 2014); California State Bd. of Equalization, Tax Information Bulletin, No. 388 (Sept. 1, 2014).

16 Kentucky Dep't of Rev., Kentucky Sales Tax Facts (June 1, 2014).

17 Washington Dep't of Rev., "Accepting Virtual Currency as Payment for Goods or Services" (Jan. 28, 2015).

18 Wisconsin Dep't of Rev., News for Tax Professionals (March 28, 2014).

19 Colorado Dep't of Rev., Private Letter Ruling PLR-13-006 (Sept. 18, 2013).

20 Georgia Dep't of Rev., Letter Ruling LR SUT-2014-05 (June 9, 2014).

21 Id.

22 Utah State Tax Comm'n, Private Letter Ruling 13-003 (Dec. 4, 2013).

23 Id.

24 Id.


Sarah McGahan is a senior manager with the state and local tax group of KPMG LLP’s Washington National Tax practice. Jennifer Jensen is a director, Alesia Lewis is a manager, and Adam DoVale is a senior associate with PwC in Washington. For more information about this column, contact Ms. Jensen at


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