Online video game provider(taxable person) submitted via its representative a request for a Letter Ruling to the North Carolina Department of Revenue(NCDOR), searching for a clarification regarding the applicability of the sales and use tax to its subscription-based services.
The private letter ruling issued by the NCDOR sheds light on the taxability rules on the provision of the add-on subscription-based services related to the principal digital product, that being a downloadable video game.
Sales Tax Digital Product
The case reviewed by the NCDOR that led to this Letter Ruling included an out-of-state taxable person(principal), who is a video-game publisher. Through its related entity, this developer sells the video game in a digital format through third-party vendors to customers in North Carolina.
The principal doesn’t charge sales tax on the sale of the video game, as the related entity and third-party vendors are mandated to collect and remit sales tax to the respective revenue authorities.
To access the video content, users need to first purchase the video game from the principal’s related entity or third-party vendors. Then, at the user’s option, the user can also enter into a monthly subscription plan offered by the principal.
Subscription-based Service
The user can terminate the service subscription at any time, while retaining access to the service until the subscription term remains. The user maintains the ownership rights to the previously purchased video game independently of the subscription.
Adherence to the monthly-subscription plan is required for users to be in a position to access the online functionality of the video game, including playing the video game in a multiplayer setting. Without the monthly subscription plan, the video game cannot be played online.
Request
The main question referred to the NCDOR is whether the monthly subscription fee is subject to North Carolina sales and use tax.
Sales Tax on Subscription for Add-On Services
NCDOR made its standpoint that led to the issuance of the letter ruling, primarily focusing on the following:
Is the prewritten computer software tangible personal property taxable under sales tax, and is the video game, as such, prewritten computer software?
Is the license to use the part of the services(feature of the computer software) based on consideration(monthly subscription fee) treated as the supply of the tangible personal property?
The NCDOR rules in this particular case that the supply of the tangible personal property at retail (downloadable video game) is a taxable prewritten computer software. The license to use additional features of the downloaded software(online multiplayer option) for consideration is treated as a taxable sale.
The subscription permits the right to use specific features of the prewritten computer software.