NOTICE: Under IC 4-22-7-7, this document is required to be published in the Indiana Register and is effective on its date of publication. It shall remain in effect until the date it is superseded or deleted by the publication of a new document in the Indiana Register. The publication of this document will provide the general public with information about the Department's official position concerning a specific issue.

Sales and Use Tax – Products Transferred Electronically

A company ("Taxpayer") is seeking an opinion as to whether certain products transferred to customers electronically are subject to Indiana sales and use tax.

Authority: IC 6-2.5-1-11.3; IC 6-2.5-1-16.2; IC 6-2.5-1-16.3; IC 6-2.5-1-16.4; IC 6-2.5-1-24; IC 6-2.5-1-26.5; IC 6-2.5-1-27.5; IC 6-2.5-1-28.5; IC 6-2.5-2-1; IC 6-2.5-2-2; IC 6-2.5-4-1; IC 6-2.5-4-16.4; Streamlined Sales and Use Tax Agreement (Sept. 20, 2009)

Taxpayer provides the following facts regarding its request for a revenue ruling. Taxpayer is in the business of developing social network games and providing access to the games via the Internet to its customers. In particular, Taxpayer further provides:

Based on the foregoing, Taxpayer requests guidance as to whether its sales to end-user customers of digital goods for use within online social games, or use of the social games themselves, accessed via the Internet, are subject to Indiana sales and use tax when provided to customers located in Indiana.

Pursuant to IC 6-2.5-2-1(a) and IC 6-2.5-2-2(a), a sales tax is imposed on retail transactions made in Indiana. Except for certain enumerated services, sales of services generally are not retail transactions and are not subject to sales or use tax. A retail transaction is defined at IC 6-2.5-4-1(b) as the transfer, in the ordinary course of business, of tangible personal property for consideration.

Also included in the definition of a retail transaction are specified digital products. IC 6-2.5-4-16.4(b) provides:

Specified digital products, as defined by IC 6-2.5-1-26.5, IC 6-2.5-1-16.2, IC 6-2.5-1-16.3, and IC 6-2.5-1-16.4, currently include only digital audio works (e.g., songs, spoken word recordings, ringtones), digital audiovisual works (e.g., movies), and digital books. Pursuant to IC 6-2.5-4-16.4(b), Indiana imposes sales and use tax only on specified digital products that are transferred electronically along with the right of permanent use that is not conditioned on continued payment by the purchaser. Products transferred electronically are defined at IC 6-2.5-1-28.5 to mean products that are "obtained by a purchaser by means other than tangible storage media."

Pursuant to Section 333 ("Use of Specified Digital Products"–Effective January 1, 2010) of the Streamlined Sales and Use Tax Agreement ("SSUTA"--September 20, 2009), of which Indiana is a signatory, "A member state shall not include any product transferred electronically in its definition of 'tangible personal property.'" Pursuant to the same section of the SSUTA, "ancillary services", "computer software", and "telecommunication services" are excluded from the term "products transferred electronically."

In order to stay in conformity with the current SSUTA, Indiana may not impose sales tax on a product transferred electronically by basing the product's taxability on inclusion of the product in the definition of tangible personal property. It is important to note that "ancillary services," "computer software," and "telecommunication services" are not restricted by the phrase "product transferred electronically."

Based on the foregoing, Indiana may impose sales tax on products transferred electronically only if the products meet the definition of specified digital products, ancillary services, pre-written computer software, or telecommunication services. It is sufficient for the purposes of this ruling to note that the products at issue currently do not qualify as "specified digital products," "ancillary services" (as defined by IC 6-2.5-1-11.3), "pre-written computer software" (as defined by IC 6-2.5-1-24) or "telecommunication services" (as defined by IC 6-2.5-1-27.5). Accordingly, Taxpayer's sales to end-user customers of its digital goods for use within online social games, or use of the social games themselves, accessed via the Internet, are not subject to Indiana sales and use tax when provided to customers located in Indiana.

Taxpayer's products transferred electronically do not meet the current definition of specified digital products, ancillary services, pre-written computer software, or telecommunication services. Accordingly, Taxpayer's sales to end-user customers of its digital goods for use within online social games, or use of the social games themselves, accessed via the Internet, are not subject to Indiana sales and use tax when provided to customers located in Indiana.

This ruling is issued to the taxpayer requesting it on the assumption that the taxpayer's facts and circumstances as stated herein are correct. If the facts and circumstances given are not correct, or if they change, then the taxpayer requesting this ruling may not rely on it. However, other taxpayers with substantially identical factual situations may rely on this ruling for informational purposes in preparing returns and making tax decisions. If a taxpayer relies on this ruling and the Department discovers, upon examination, that the fact situation of the taxpayer is different in any material respect from the facts and circumstances given in this ruling, then the ruling will not afford the taxpayer any protection. It should be noted that subsequent to the publication of this ruling a change in statute, regulation, or case law could void the ruling. If this occurs, the ruling will not afford the taxpayer any protection.