Tennessee Rules that Memberships to Live and On-Demand Fitness Classes are Subject to Sales Tax

May 31, 2023

By: Tracey Stewart, SALT Associate

At a glance

  • The main takeaway: Membership fees that included live and on-demand fitness classes were deemed taxable as digital goods by the State of Tennessee. 
  • Assess the impact: Many states subject the sale of digital goods to sales tax; however, each state taxes them in a different manner. 
  • Take the next step: Aprio’s State and Local Tax (SALT) team can help you understand the various state tax rules regarding digital products, so you do not incur any unexpected tax liabilities and penalties. 

Schedule a free consultation today to learn more!

The full story:

A recent Tennessee Department of Revenue Letter Ruling addressed the taxability of membership sales that included access to live and on-demand fitness training classes, concluding that such sales were subject to sales tax when sold to Tennessee customers. 

A closer look at the case

The taxpayer in the case sells home exercise equipment that can connect to the internet. Additionally, the taxpayer also sells memberships that provide users access to live interactive fitness classes and pre-recorded on-demand classes. The classes can be viewed on the exercise equipment, or they can be viewed on a phone or tablet that is connected to the internet. During a live class, the performance information for all users in the class is posted on a leaderboard screen and includes biometric information analysis through the use of data points, such as heartrate, calorie burn and distance traveled. For on-demand classes, users can compare their performance against the other participants who took the live version of the class. 

To analyze the potential taxability of the memberships, the state first explained that on-demand classes are taxable because they meet the definition of “specified digital products” which includes “digital audio-visual works.”1 A “digital audio-visual work” is “a series of related images that, when shown in succession, impart an impression of motion, together with accompanying sounds, if any, that are transferred electronically.” One instance when a “specified digital product” is taxable is when it is “sold with rights of use conditioned upon continued payment by the subscriber or purchaser.”  

The ruling explained

Given the conclusion that the memberships include a taxable product and a non-taxable product (live interactive fitness classes), the state analyzed how that impacts the overall taxability of the membership fees. Under Tennessee law, when separate products are sold for one non-itemized price and at least one of the products being sold is taxable, the entire sale is subject to sales tax.2 This is referred to as a “bundled transaction,” and in this case, the company bundled live classes with pre-recorded on-demand classes in their single membership price. Because the membership fees do not contain itemized pricing for each offering, the ruling concludes that the entire transaction is subject to sales tax even though the live interactive classes are not taxable. 

The taxpayer argued that the interactive nature of the on-demand classes (i.e., being able to see biometric data) meant that the classes did not qualify as a “specified digital product” or that the membership fees were exempt data processing and information services due to the biometric tracking and leaderboard information. The state dismissed these arguments, noting that even though some portion of the membership included these features, it doesn’t change the underlying nature of the offering or the purchaser’s primary purpose for subscribing, which is ultimately to have access to the live and on-demand fitness classes.  

The point of the ruling is simple, regardless of the taxability of other components attached to the membership, since the membership includes taxable “specified digital products,” the entire transaction is subject to sales tax because the product is bundled and not separately itemized. 

The bottom line

More states are subjecting the sale of digital goods to sales tax, but not all states tax them in the same manner. For example, Georgia will begin taxing digital products in 2024, which include many of the same types of digital products that are taxable in Tennessee.3 However, unlike Tennessee, Georgia’s tax will apply only when “the transaction is not conditioned upon continued payment by the end user.” Thus, under Georgia’s new law, the membership fees may not be taxable because the right to access the classes requires that the purchaser continue paying for the membership.

Aprio’s SALT team has experience with the varying and rapidly changing state tax rules regarding digital products, and we will assist your business to determine any new state tax compliance obligations so that you do not incur any 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.

This article was featured in the May 2023 SALT newsletter.

1 Tenn. Code Ann. §§ 67-6-102(30) and (94) (defining “specified digital products” and “digital audio-visual works”) and 67-6-233(b) (imposing sales tax on the sale of “specified digital products”). 

2 Tenn. Code Ann. § 67-6-102(87)(A)(vi).

3 See Georgia SB 56, which was signed by Governor Kemp on May 2, 2023. For more information about this legislation and other Georgia tax changes from the 2023 legislative session, see our article in this Newsletter.

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