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In a recently issued revenue ruling, the Tennessee Department of Revenue determined that a taxpayer’s digital services provided to other businesses were taxable “specified digital products,” a broad term based on definitions (and subject to detailed operating rules) in the Streamlined Sales and Use Tax Agreement. Sellers of business-to-business digital services should review this ruling to determine whether their offerings may be subject to Tennessee sales tax as a specified digital product, which historically has been associated with consumer digital goods like digital video and digital music.
First, the DOR determined that overhead music services and on-hold messaging services are taxable “digital audio works.” The taxpayer’s overhead music services consist of pre-programmed, commercial-free music, along with optional add-on services involving the insertion of customer-specific promotional messages into the music playlists, all of which were determined to be taxable. Its on-hold messaging services include the production of customized recorded messages, including script (advertising/marketing/copyrighting), consultation services, any music licensing fees incurred in production of the messaging, and professional talent options used to produce the messages.
The DOR further ruled that the taxpayer’s customized videocast programming services, which allow custom promotional content to be played on video screens at customers’ locations, are subject to sales and use tax as a “digital audio-visual work.” However, the DOR concluded that optional weather, news, and stock-ticker feeds that could be included with the videocast programming services are exempt information services pursuant to Tenn. Code Ann. § 67-6-233(d).
Finally, for each digital service under consideration, the DOR found that the taxpayer did not permit its customers to retransmit the content. Accordingly, the customers bore the incidence of the tax as end users, thereby obligating the taxpayer to collect.
Tenn. Dep’t Revenue, Ruling #20-03 (May 4, 2020)