Revenue Commissioner Stands By iTunes Tax Legality Despite Letter Ruling Arguing The Contrary
Posted on May 6, 2008 at 11:05 amTerry Frank posts this morning that “the fat lady has not sung” when it comes to the iTunes tax. She asserts that the Tennessee Republican Party had not jumped the gun when they asserted that the tax on digital downloads was a new tax contained in the now introduced technical corrections bill. At issue is a March 12 letter ruling currently circulating in anti-tax circles issued by the Revenue Department’s legal counsel and approved by the Commissioner himself that would seem to contradict recent reports in the media that digital downloads are taxable in Tennessee since the start of the new year.
Two weeks ago, after a Waller, Lansden, Dortch and Davis email was posted online sounding the alarm of the new tax coming down the pike, it was subsequently pointed out that Apple and other online music retailers were already collecting taxes on music downloaded online.
At the time, Revenue Commissioner Reagan Farr stated to various media outlets that the Tennessee Republican Party and Waller Lansden were in error. The new technical corrections bill now before the General Assembly was not instituting a new tax but simply clarifying language in the Tennessee Annotated Code that already authorized the taxation of downloaded music.
The Commissioner explained that the tax was authorized by code changes in the previous year and that an iTunes song was considered “pre-written computer software” [T.C.A. §§ 67-1-102 (60)] that then “performs the task“[T.C.A. §§ 67-1-102 (17)] of playing on your iPod.
However, a March 12 letter ruling by the Revenue Commissioner [available here] would seem to tell a different story.
In the letter, the Revenue Commissioner and counsel state that while songs preloaded on machine sold to consumers are taxable, songs delivered electronically are not taxable:
Tenn. Code Ann. § 67-6-102(80) (Supp. 2007) 2 defines“tangible personal property” to include property that can be “seen, weighed, measured, felt, or touched.” For example, music sold on a compact disc, or CD, is subject to the sales and use tax because the music is sold on a tangible storage medium. Music purchased on a tangible storage medium has always been subject to the sales and use tax…
…Music is non-taxable only if it is delivered electronically. Accordingly, charges for the music services and packages provided by the Taxpayer that relate to music on a tangible storage medium are taxable as sales of tangible personal property, while charges related to music delivered electronically are not.
The letter, as is clearly stated on the document itself, is binding only for the specific case addressed. However, the arguments contained within and the code and definitions cited as to how digital downloads are to be taxed would seem to contradict the reasoning Commissioner Farr previously gave Post Politics as to why digital downloads have been taxable since January of this year.
In a letter to legislators obtained by P-squared, the president of the Software Finance and Tax Executives Council, Mark E. Nebergall, states:
We believe any out-of-state firm collecting sales tax on such sales does so in error and is likely, in the wake of the March Revenue Ruling, to stop collecting taxes on future sales and could seek tax refunds for erroneously collecting taxes on past sales. In fact, some SoFTEC members are in the process of implementing changes to their systems to stop collecting sales taxes on sales of downloaded products to Tennessee customers. Firms erroneously collecting sales taxes risk consumer class action lawsuits.
Commisioner Farr, when contacted by Post Politics explained that the March 12 letter ruling had been revoked. He could not say when the revocation had taken place but that the taxpayer in question had been notified and given ample time to adjust to the revocation.
“We have a six to eight month turn around on letter rulings and this specific ruling was drafted before the new changes took effect in January. It was modified shortly thereafter [but before revocation] to reflect the new law but before we had really taken a good look at the changes. It is unfortunate that the ruling was ever released.”
Any companies ceasing collection of tax based on this revocated letter ruling would be in error according to Farr. Farr went on to emphasize, revocation aside, that letter rulings are, in fact, not broadly applied documents to be used to interpret tax law by any party other than the taxpayer addressed.
The Department of Revenue releases two different types of rulings, Letter and Revenue. A Revenue ruling is the type of document that can be interpreted as Revenue department policy, a letter ruling cannot and should not be Farr explains.
Farr said there has been no Revenue ruling on the specific case of iTunes downloads but maintained that he feels “very comfortable” with his position that iTunes songs are prewritten computer software that performs a task and thus taxable.
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Bill Hobbs
Comments
5 Responses to “Revenue Commissioner Stands By iTunes Tax Legality Despite Letter Ruling Arguing The Contrary”
Not being an attorney, I wonder if a class action lawsuit could be filed against the State for illegally taxing our downloads.
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“The Commissioner explained that the tax was authorized by code changes in the previous year and that an iTunes song was considered “pre-written computer software” [T.C.A. §§ 67-1-102 (60)] that then “performs the task“[T.C.A. §§ 67-1-102 (17)] of playing on your iPod.”
This is ridiculous. A song is not software any more than a document file is software. Based on this logic, a doc. file could reasonably be argued to be included in the tax scheme. You email a doc file and then someone downloads it for performing the task of giving you information.
It takes software and hardware to create and play the music files (and that is properly taxed), but the files themselves are not software.
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[...] if the somewhat tortured interpretation of Tennessee annotated code that the Department of Revenue has been using to collect tax on digital downloads of books, music and movies would have held up to a serious [...]