North Carolina Taxes Subscription Fees on Digital Educational Content

By: Camille Adams, SALT Senior Associate

At a glance:

• The main takeaway: Over 30 states now impose sales tax on digital products, and as illustrated in a recent North Carolina ruling, these taxes do not apply just to traditional digital products like eBooks, music, and videos.
• Assess the impact: Since the sales tax treatment of certain digital property varies from state-to-state, it’s important for taxpayers to understand their sales tax obligations for their digital products.
• Take the next step: Aprio’s State and Local Tax (SALT) team can advise your business on the taxation treatment of your digital content transactions.

Schedule a free consultation today to learn more!

The full story

Technological advances have resulted in a variety of changes to the way that we consume goods and services. One of those areas involves the consumption of books, music, and videos, where there has been a shift from the purchase of these items in tangible form to the purchase of these items in digital form. For example, hard and soft cover books and CDs have been replaced by eBooks and digital music subscriptions like Spotify and Apple Music.

This evolution has impacted state sales tax revenues, which have historically relied on the sales tax collections from the sale of tangible books and CDs. As sales of digital goods increased, state sales tax revenue declined because sales tax was imposed on the sale of tangible personal property. As a result, states began to enact laws to impose sales tax on digital goods, and currently over 30 states do so. Not surprisingly, the states have different rules defining digital goods and what types of sales are subject to tax.  As illustrated by a recent North Carolina Department of Taxation private letter ruling,[1] states may apply their taxes to transactions involving more than just traditional digital books, music, and videos.

A closer look at the taxpayer’s digital education content

The taxpayer provides a variety of online learning products for students, including interactive lessons, songs, videos, books, printable worksheets, live tutoring, online video games, and quizzes. Additionally, the product offered a math program that adapted to each student’s learning needs. Customers could also request online support via a chat feature. These products are accessed remotely via a web browser or an application downloaded to the customer’s device, with customers paying a subscription fee to access the content.

North Carolina imposes sales tax on gross receipts derived from tangible personal property, taxable services, and certain digital property.[2] The tax applies to the amounts paid to access certain digital property regardless of whether the purchaser has a right to use it permanently or to use it without making continued payments.

North Carolina defines certain digital property as “specified digital products” and “additional digital goods.”[3]

• Additional digital goods include magazines, newspapers, newsletters, photographs, and greeting cards if they are transferred electronically.[4]  
• Specified digital products are defined as “digital audio-visual works,” “digital audio works,” and “digital books.”[5] Digital audio works consist of a series of musical, spoken, or other sounds transferred electronically, while digital audiovisual works are a series of related images that, when shown in succession, present motion and may include sounds, that are also transferred electronically.[6]

Unpacking the ruling

Tax applied to digital subscription fees

The Department ruled that the subscription fees are taxable because customers are paying for access to digital property, such as online lessons, videos, books, and printable worksheets.  Notably, the ruling explained that the taxpayer is not viewed as selling software as a service (SaaS) since the customers are paying for access to the digital content, even though the software allows users to sort and search the content.[7] Without explicitly stating it, the ruling essentially concludes that the true object of the transaction is the access to the contact, and the ability to sort and search via software is incidental to the overall transaction.    

Tax applied to bundled transactions

Finally, the ruling noted that the taxpayer’s math program, when provided online via remote access (i.e., not downloaded), is a standalone product that is not subject to sales tax because the state does not tax SaaS. Since a customer’s subscription price includes both access to the digital content and the use of the software, this transaction may be viewed as a “bundled transaction.”

A “bundled transaction” is defined as, “A retail sale of two or more distinct and identifiable items, at least one of which is taxable and one of which is nontaxable, for one nonitemized price. . . . Items are not sold for one nonitemized price if an invoice or another sales document made available to the purchaser separately identifies the price of each item.”[8]

Generally, sales tax applies to the single price for a bundled transaction unless a particular exemption applies. Two potential exemptions that could apply here are:

• The bundle includes a service, and the retailer determines an allocated price for each item in the bundle based on a reasonable allocation of revenue that is supported by the retailer’s business records kept in the ordinary course of business. In this circumstance, tax applies to the allocated price of each taxable item in the bundle.
• The price of the taxable items in the bundle does not exceed 10% of the price of the bundle.[9]

In this case, there was not enough information provided for the ruling to reach a definitive conclusion.

The bottom line

The sales tax treatment of digital property varies from state-to-state. For example, while North Carolina taxes access to certain digital property regardless of whether the right to use that property is permanent, Georgia taxes the sale of digital property only when the right to use the digital property is permanent and not contingent on continued payment.[10]  

Aprio’s SALT team has experience advising taxpayers on the taxation of transactions involving digital content. Our team can assist your business with taxability decisions for your revenue streams so that you remain in compliance with your sales tax obligations and do not incur unexpected liabilities and penalties. We constantly monitor these and other important state tax topics and will include any significant developments in future issues of the Aprio SALT Newsletter.

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[1] N.C. Private Letter Ruling SUPLR 2024-0011 (Nov. 1, 2024).

[2] N.C. Gen. Stat. § 105-164.4(a) and (b)

[3] N.C. Gen. Stat. § 105-164.3(33).

[4] N.C. Gen. Stat. § 105-164.3(5).

[5] N.C. Gen. Stat. § 105-164.3(253).

[6] N.C. Gen. Stat. § 105-164.3(59) and (61).

[7] Remote access to software (SaaS) is not subject to sales tax in North Carolina.

[8] N.C. Gen. Stat. § 105-164.3(25).  The statute identifies certain excluded transactions.

[9] N.C. Gen. Stat. § 105-164.4D. 

[10] Ga. Code Ann. § 48-8-30(2)(A)