The Big Easy’s Sales Tax on Apple’s Music Streaming Service Struck Down as Discriminatory

At a glance

• The main takeaway: The Louisiana Board of Tax Appeals ruled in favor of Apple stating that federal law prohibits New Orleans from imposing local sales tax on the music streaming service because the city does not tax a substantially similar service provided via satellite radio.
• Assess the impact: Given the increased shift of services being offered over the internet, state and local governments will likely continue to attempt to impose taxes on transactions occurring online, but they need to be careful about running afoul of federal law.  
• Take the next step: Aprio’s State and Local Tax (SALT) team can review your state sales tax obligations and help you stay compliant.

Schedule a free consultation today to learn more!

The full story

On May 2, 2024, the Louisiana Board of Tax Appeals (Board) ruled in favor of Apple to overturn New Orleans’ (City) assessment of the City’s sales tax on subscription fees paid by customers for the Apple Music streaming service.[1] The Board held that the City’s imposition of sales tax on Apple Music subscriptions was an illegal discriminatory tax under the Internet Tax Freedom Act (ITFA).

ITFA, enacted in 1998, implemented a moratorium preventing state and local governments from taxing Internet access or imposing multiple or discriminatory taxes on electronic commerce (after many extensions, these prohibitions became permanent in 2016). The ban on discriminatory taxes on electronic commerce prohibits additional taxes or an alternative tax rate on a good, service, or information delivered electronically that would differ from the tax or rate applied to the same, or similar, good, service, or information if it were purchased through traditional commerce. 

A closer look at the issue

In the context the Apple decision, the City sought to impose sales tax on Apple Music subscription fees but did not impose its sales tax on fees to access satellite radio services like SiriusXM. Thus, Apple asserted that the City’s tax assessment was barred by ITFA as a discriminatory tax on electronic commerce because satellite radio is a substantially similar service and is not subject to the City’s sales tax. For purposes of ITFA, “electronic commerce” means “any transaction conducted over the Internet or through Internet access.” This includes the sale, lease, license, or delivery of goods, services, or information, including the provision of internet access. 

ITFA does not fully prohibit a state or local government from imposing a sales tax on goods or services offered through the internet. A tax becomes a discriminatory tax when the same or substantially similar good or service is not taxable when purchased through other means. In the Apple case, the Board concluded that Apple Music and satellite radio (specifically, SiriusXM) are “essentially the same service” and the only difference between the two services is the “medium by which the services are provided.” Here, the City was preempted from imposing its sales tax on satellite radio services under the Federal Telecommunications Act (FTA). The FTA’s preemption creates a situation whereby the City is prohibited from taxing the same service offered through the internet due to ITFA’s ban on discriminatory taxes. 

The bottom line

One can presume that state and local governments are aware of ITFA’s ban on discriminatory taxes on electronic commerce. Thus, it is interesting that taxes that are clearly at odds with this ban are enacted. New Orleans is not alone in this regard. The other main context where states have recently attempted to enact potentially discriminatory taxes is digital advertising. Over the last few years, there have been bills proposing state taxes on certain activities related to digital advertising.  So far, Maryland is the only state to successfully enact such tax, when the state’s digital advertising tax was implemented in 2022. Maryland’s digital advertising tax has faced several legal challenges in state and federal court, with procedural issues preventing the merits of the tax from being fully analyzed thus far. 

Given the continued shift to services being offered over the internet, state and local governments will likely continue to attempt to impose taxes on transactions taking place online.  One of the challenges will be to ensure such taxes do not run afoul of federal law. 

Aprio’s SALT team constantly monitors 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] Apple, Inc. v. Collector of Revenue of the City of New Orleans et. al., Docket No. L01283 (May 2, 2024).