Tennessee Ruling Concludes that Certain Audio and Visual Services Constitute Taxable Digital Products
July 28, 2020
A recent Tennessee Revenue Ruling explains the application of the state’s sales tax on digital products to the taxpayer’s audio/visual services. Businesses should consider whether their products/services might be taxable as digital products.
By: Betsy Tuck, SALT Manager
States traditionally assess sales tax on tangible personal property, including intellectual property sold via tangible mediums, such as software, movies, music and books. As these items can now be sold through a digital medium, states face losing sales tax revenue on these products unless they update their statutes to address the taxability of these transactions. Currently, over half of the states impose sales tax on digital products. A recent Tennessee Revenue Ruling illustrates how broadly these rules may be applied to include B2B digital services, and some states have updated their legislation to define how the state will treat the sales of the digital products.
In the Tennessee case, the “Taxpayer” requested clarification on whether its On-hold Messaging (OHM) service, VideoCast Programming (VCP) service, and Overhead Music (OM) service are subject to sales tax. The Taxpayer’s services are defined below:
- The OHM service provides custom marketing messaging for its telephone systems, allowing those systems to direct call traffic to various sales departments. The service includes productions of customized recorded messages, including scripts, consultation services and music licensing fees.
- The VCP service provides custom promotional content that can be played on video screens at the customer’s location. In addition to custom promotional content, the customer may also purchase, for an additional fee, generic content such as weather feeds, news feeds and/or a stock market ticker feed. A menu board and other content, such as the status of an order, may also be displayed.
- The OM service provides customers with pre-programmed channels of advertisement-free music that customers can play at their locations. For an additional fee, customers may purchase customized promotional messages (e.g., messages that direct shoppers to a current sale item or remind them about seasonal specials) that are inserted into the music playlist.
Each of the three services is delivered electronically, and the customer is prohibited from retransmitting, reproducing and duplicating any of the messages or recordings created by the taxpayer.
Tennessee imposes sales tax on the sale of “specified digital products” that are sold with rights of either permanent or less than permanent use or that are sold with rights of use conditioned on continued payment by the purchaser. “Specified digital products” are defined as “electronically transferred digital audio-visual works, digital audio works and digital books,” and “electronically transferred” is defined as “by means other than tangible storage media.”
“Digital audio works” are “works that result from the fixation of a series of musical, spoken, or other sounds” and “digital audio-visual works” are “a series of related images that, when shown in succession, impart an impression of motion, together with accompanying sounds.”
Based on these definitions, the Department of Revenue ruled that the Taxpayer’s OHM and OM services are taxable as digital audio works and that the VCP service is taxable as a digital audio-visual work. The only exception is any additional charge for the weather, news and/or stock market feeds, which are treated as exempt information services.
Many of these digital product statutes have been enacted relatively recently and further guidance is being released on how states are interpreting these rules. It is important for businesses to reassess the products and services they provide electronically to determine if they are taxable as digital products.
Aprio’s SALT team understands how digital sales tax rules affect your sales tax obligations. We can assist your business to ensure that you remain in compliance and do not incur unexpected sales tax liabilities and penalties, which may include seeking a ruling from the state to address your unique facts and circumstances. 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 July 2020 SALT Newsletter.
 Tennessee Department of Revenue, Revenue Ruling # 20-03, May 4, 2020.
 Tenn. Code Ann. § 67-6-233(b)(1)-(2).
 Tenn. Code Ann. § 67-6-102(92).
 Tenn. Code Ann. § 67-6-102(29), (30).
 Tenn. Code Ann. § 67-6-233(d).
 For additional information, please see our May 2020 SALT Newsletter where we addressed an Arkansas ruling on the taxation of digital products.