More than an iTunes Tax

Jo Stahl, Tax Senior Manager   email
December 2009

Effective October 1, 2009, transfers of digital goods are now subject to Wisconsin sales and use tax. This change eliminates an advantage from which Internet shoppers previously benefited. Prior to October 1, Wisconsin customers that purchased products electronically (such as music) were not subject to sales or use tax even though the tangible personal property (such as CDs) were taxable. Some have dubbed this as the “iTunes tax,” however, the definition of digital goods is broad and far-reaching.

Wisconsin sales tax is now imposed on the sale, lease, license or rental of specified digital goods if the transaction occurs in Wisconsin. The tax applies for the right to use the specified digital goods on a permanent or less than permanent basis. For sales in which the retailer is not required to collect sales tax at the point of sale, Wisconsin use tax is imposed if the digital good is stored, used or consumed in Wisconsin. Specified digital goods are defined as digital audio works, digital audiovisual works and digital books, and include the following:

• Music
• Ringtone
• Other digital audio works – Including recorded or live readings of books, other written materials, lectures and speeches.
• Movies
• Motion pictures
• Musical videos
• News and entertainment programs
• Live or recorded events (e.g., professional football games and stock car races)
• Digital book – Including any literary works expressed in words, numbers, or other verbal or numerical symbols or indicia, and generally recognized in the ordinary and usual sense of a book, work of fiction, nonfiction or a short story. Examples of digital books include novels, autobiographies, encyclopedias, dictionaries, repair manuals, phone directories, business directories, zip code directories, educational textbooks and cookbooks.

Please note that this list is not all-inclusive. Additional digital goods that are subject to sales and use tax include the following:

• Greeting cards
• Finished artwork – Including drawings, paintings, designs, photographs, lettering, paste-ups, mechanicals, assemblies, charts, graphs and illustrative materials. This does not include web site or home page designs; however, such items may fall under the other news and information products category.
• Periodicals
• Videos and electronic games
• Other news and information products – Including web site, mailing lists, databases and training materials.

The sale, storage, use or consumption of a digital code, which allows you to download a digital good, is treated in the same manner as the sale, storage, use or consumption of any specified digital good. Prewritten computer software is different and is treated as the electronic delivery of tangible personal property and is not a digital good for purposes of Wisconsin’s sales and use tax laws. Thus, software transferred electronically would be subject to sales and use tax as the sale of tangible personal property and not as the sale of a digital good. An example of this is a downloaded software program, such as internet security protection.

The tax rate charged on a transaction is dependent upon when and where the sale occurs. A sale is completed at the earlier of: the time when possession is transferred to the purchaser or the digital good is first used. Wisconsin Department of Revenue (WDR) Publication 240 includes a hierarchy for sourcing the sale of a digital good as follows:

• Seller’s location (over-the-counter sales)
• Delivery location
• Purchaser’s address in seller’s records
• Purchaser’s address obtained during transaction
• Location from which shipped

Certain exemptions still may apply to the tax on digital goods. If the sale of the tangible counterpart is exempt, the sale of the digital good is exempt. Sales of digital goods to tax-exempt organizations remain exempt, and exemptions for manufacturing and farming activities also exist.

Businesses and individuals should note that the sales tax on digital goods extends beyond entertainment. Graphic artists, photographers, printers, web designers and others in similar fields are likely to experience an increase in their production costs. As we near the close of another year, sellers and purchasers should examine their potential sales and use tax exposure and modify their tax practices accordingly. For more information, please refer to WDR Publication 240 or contact Jo Stahl (262/754-9400 ext. 258).