Offline-Download Feature in a Streaming Service Bundle Made Entire Charge Taxable in Utah

By: Jess Johannesen, SALT Senior Manager

At a glance

• The main takeaway: A taxpayer offered more than one product as part of a bundled package and Utah determined that the entire bundle should be subject to sales tax because one of the products or services included with the bundle is deemed taxable.
• Assess the impact: The decision in this case highlights the importance of fully analyzing the taxability of transactions where multiple products or services are offered for one price and one of the items included in the package may be taxable. 
• Take the next step: Aprio’s State and Local Tax (SALT) team can help you analyze sales tax issues related to bundled transactions to ensure your company complies with state sales tax obligations.

Schedule a free consultation today to learn more!

The full story:

The Utah State Tax Commission (the Commission) recently determined that a taxpayer was liable for sales and use tax on subscription fees that the taxpayer charged to its customers on streaming services, which included an offline-download feature.¹

A closer look at the case

The taxpayer was a multinational provider of licensed and original entertainment programming that offered various subscriptions to its streaming services platform for a monthly fee, including the ability to download programming to view offline through the streaming platform.

The taxpayer had been collecting and remitting sales tax on its subscription service for many years, but the taxpayer stopped after legislation imposing sales tax on online streaming services was repealed in 2019. The taxpayer was audited by the Business Taxes and Discovery Division (the Division) for the period of March 1, 2019, through November 30, 2021, and was assessed sales tax on its subscription fees for that period. The taxpayer appealed the assessment.

The Division argued two points:

1. The subscription fees were taxable as “products transferred electronically” despite multiple private letter rulings (PLRs) from the Commission to the contrary² and
2. In the event that the Commission followed its prior PLRs that concluded online streaming was not taxable, the entire subscription fee was taxable as a “bundled transaction” because the offline-download feature was a taxable “product transferred electronically.”
   

The ruling explained

The Commission disagreed with the Division’s first argument and did not find grounds to overturn its prior PLRs on this issue. In other words, the Commission agreed with the taxpayer that sales tax was not imposed on streaming transactions during the audit period. 

As such, the Commission turned to the Division’s alternative argument that the subscription was taxable as a “bundled transaction.” Under Utah law, a bundled transaction is the “sale of two or more items of tangible personal property, products, or services if the tangible personal property, products, or services are: (i) distinct and identifiable; and (ii) sold for one nonitemized price.”³ A product or service is not “distinct and identifiable” if it is “provided free of charge with the purchase of another item.”⁴

The taxpayer argued that the inclusion of the offline-download option with the online-streaming option was not a “bundled transaction” because the offline-download feature was provided free of charge, and this not “distinct and identifiable.” As such, the taxpayer claimed that the Commission should consider the entire package as non-taxable under the true object test based on the taxpayer’s assertion that 99% or more of its content is viewed using the online-streaming feature.

However, the Commission found that the taxpayer did not provide sufficient evidence to prove that the offline-download feature was provided free of charge. For example, the evidence reflected that the offline-download benefit increased depending on the tier of the subscription package, and the monthly subscription fee increased as well. The Commission reasoned that if the offline-download was provided free of charge, then it would seem logical that the download capability would be the same across all packages.

Therefore, the Commission concluded that the taxpayer’s platform with online and offline viewing options constituted a bundled transaction, and therefore, the entire subscription fee is taxable since the offline-download feature is taxable as a “product transferred electronically.” The Commission acknowledged the taxpayer’s argument that the result is harsh given the taxpayer’s assertion that more than 99% of the content is viewed using the nontaxable online-streaming feature, but the Commission noted that there are exceptions in the bundled transaction statutes that could “temper this result.” For example, there are exceptions when the sales price of the taxable product is de minimis. However, the taxpayer did not include these exceptions in its argument and did not offer evidence that its subscriptions meet such exceptions.

This decision highlights the importance of analyzing the taxability of transactions where multiple products or services are offered for one price and one of the items included in the package may be taxable. If the taxpayer instead argued (and could prove) that the offline-download product was de minimis, the Commission may have agreed with the taxpayer. 

The bottom line

While this Utah decision involves subscriptions to streaming services, similar bundled transaction rules may also apply to memberships. For example, we generally think of free two-day shipping for Amazon Prime memberships. However, the membership also includes access to movies, music, Kindle books and other products, one or more of which may be taxable. As such, Amazon’s website lists the many states in which its membership package is taxable.

Aprio’s SALT team has experience addressing sales tax issues related to bundled transactions and can help you analyze these rules, so no stone is left unturned. We can assist your business to ensure you are complying with state sales tax obligations so that you do not incur unexpected tax liabilities and penalties. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

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¹ Utah State Tax Commission, Decision No. 22-1274, 10/23/2023.

² Utah taxes “products transferred electronically” which is defined as “product transferred electronically that would be subject to a tax under this chapter if that product was transferred in a manner other than electronically.” See Utah Code §§ 59-12-103(1)(m) and 59-12-102(103).

_³ Utah Code § 59-12-102(19)(a).

⁴ Utah Code § 59-12-102(19)(c).