Which video-game access codes and stored-value cards must a Kansas retailer charge sales tax on?

Plain-English summary

A retailer that sells video-game products in physical stores and online asked the Department to clarify how Kansas sales tax applies to five kinds of digital-content products. The dividing line the Department drew is simple: is the customer getting downloadable prewritten software, or just access to online content?

• Remote access software / "virtual goods" (an access code that unlocks game content residing on a third-party server) — Not taxable. Neither the initial sale of the code nor its redemption is taxed, because the content is not prewritten software.
• Downloadable digital content (an access code to download prewritten software — complete games or add-ons — to the customer's computer, console, or device) — Taxable. The initial sale of the access code for prewritten software is taxable, whether sold in-store or online.
• Subscription cards (plastic cards giving subscription time on online networks) — Not taxable, at sale or at redemption, because the network content is not prewritten software.
• Point cards (cards holding point values used within online networks) — Not taxable, at sale or redemption, for the same reason.
• Notional dollar-value cards (cards holding dollar values used within online networks) — Not taxable, at sale or redemption.

The Department summed it up as a general rule: only downloadable prewritten software that is delivered — physically or digitally — to a Kansas user is subject to Kansas Retailers' Sales Tax. Codes and cards that merely unlock access to content hosted on someone else's server fall outside the tax.

What this means for you

Retailers of games, apps, and digital content

Tax hinges on what the customer ultimately receives. If a code delivers downloadable prewritten software (a game or add-on installed on the device), charge sales tax. If a code or card only grants access to online/streamed content or network time on a third-party server, don't tax it — at sale or redemption. Selling online versus in a physical store does not change the answer.

Buyers of game cards and access codes

A gift-card-style code for network access, subscriptions, points, or dollar value generally isn't taxed when you buy it. Tax attaches when what you're really buying is downloadable prewritten software.

Common questions

Q: Are video-game gift/point/subscription cards taxable in Kansas?
A: Not per this ruling. Subscription cards, point cards, and notional-dollar-value cards for online-network content are not taxable at sale or at redemption, because the content is not prewritten software.

Q: When is a downloadable game taxable?
A: When the access code lets the customer download prewritten software (a complete game or add-on) to their device — that initial sale is taxable, in-store or online.

Q: Does redeeming an access code for online content trigger tax?
A: No. The Department said redeeming codes for online-network content does not prompt sales tax, because those items are not prewritten software.

Q: Does it matter whether I sell in a store or on a website?
A: No. The Department gave the same answer for physical-retail and internet sales in each category.

Citations and references

• The ruling does not cite specific statute sections. The Department stated the controlling general rule: only downloadable prewritten software delivered physically or digitally to a Kansas user is subject to Kansas Retailers' Sales Tax; access codes and stored-value cards for content hosted on a third-party server are not prewritten software and are therefore not taxable.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2015-001

Original ruling text

Private Letter Ruling

Body:

March 25, 2015

XXXXXXX
XXXXXXX
XXX XXXX
XXXXXXX

Dear Ms. XXXXX,

Thank you for your letter dated October 8, 2014. In it, you request the department clarify any updates and/ or changes to the application of sales tax on certain products currently available for sale in your retail stores as well as on your website. This response has been broken down to accommodate the answers relevant to each of the representative products you cited for reference.

1) Remote access software/ virtual goods- The purchase by retail consumers of digital content for the use in an online video game. The virtual goods are accessed by consumers online and typically involve either accessing a complete game or additional content within a game that resides on a third party computer server.

XXXXXX sells an access code printed on a paper receipt to individual customers that allows the customer to access the described content on a third party server. XXXXXX soon will also sell such codes via its website and consumers would print out or otherwise record the code displayed on screen for later use.

Please clarify whether the sale of such access codes by XXXXXX in a physical retail environment and/or via the internet is taxable.

Answer: The initial sale of the access codes is not taxable whether sold in a physical retail environment and/or via the internet. When the access code is redeemed for the purchase of digital content for the use in an online game that resides on a third party user, the redemption of the access code does not initiate the sales tax because the aforementioned items are not prewritten software and therefore are not subject to the Kansas Retailers’ Sales Tax.

2) Downloadable digital content- the purchase by retail consumers of electronically delivered pre-written software in the form of complete video games or video game add-ons that are downloaded directly to a customer’s personal computer, gaming console, or mobile device.

XXXXXX sells an access code printed on a paper receipt to individual customers that allow the customer to download software from a third party server directly to the customer’s device. XXXXXX will also soon sell such codes via its website and consumers would print out or otherwise record the code displayed on the screen for later use.

Please clarify whether the sale of such access codes by XXXXXX in a physical retail environment and/or via the internet is a taxable transaction.

Answer: The initial sale of the access codes of prewritten software is taxable whether sold in a physical retail environment and/or via the internet.

3) Subscription cards- the purchase by retail consumers of plastic cards containing subscription time to be used to access online networks that allow gameplay, interaction among other players on a network, access to digital online content, or the direct download of digital content to a consumer’s device.

XXXXXX sells plastic cards containing a subscription that allow the consumer to access third network or content on a third party network for specified period of time. Cards offering points may provide network access for a period of time, be used to access digital content on the network, or be used to directly download digital content from the network.

Please clarify whether or not the sale of subscriptions cards by XXXXXX in a physical retail environment and/or via the internet is a taxable transaction.

Answer: The initial sale of the subscription cards whether sold in a physical retail environment and/or via the internet is not taxable. When the subscription cards are redeemed for access to online networks that allow gameplay, interaction among other players on a network, access to digital online content, or the direct download of digital content to a consumer’s device, the redemption of the subscription does not prompt the sales tax because the items are not prewritten software and therefore are not subject to the Kansas Retailers’ Sales Tax.

4) Point cards- the purchase by retail consumers of plastic cards containing point values to be used within online networks for game play, interaction among other players on a network, access to digital online content, or the direct download of digital content to a consumer’s device.

XXXXXX sells plastic cards containing points that allow the customer to access content on a third party network for specified number of points. Cards offering points may provide network access for a period of time, be used to access digital content on the network, or be used to directly download digital content from the network

Please clarify whether or not the sale of point cards by XXXXXX in a physical retail environment and/or via the internet is a taxable transaction.

Answer: The initial sale of the point cards whether sold in a physical retail environment and/or via the internet is not taxable. When the point cards are redeemed for access to online networks that allow gameplay, interaction among other players on a network, access to digital online content, or the direct download of digital content to a consumer’s device, the redemption of the subscription does not prompt the sales tax because the items are not prewritten software and therefore are not subject to the Kansas Retailers’ Sales Tax.

5) Notional dollar value cards- the purchase by retail consumers of plastic cards containing notional dollar values to be used within online networks for game play, interaction among other players on a network, access to digital online content, or the direct download of digital content to a consumer’s device.

XXXXXX sells plastic cards containing notional dollar values that allow the customer to access content on a third party network for specified number of points. Cards offering points may provide network access for a period of time, be used to access digital content on the network, or be used to directly download digital content from the network

Please clarify whether or not the sale of notional dollar value cards by XXXXXX in a physical retail environment and/or via the internet is a taxable transaction.

Answer: The initial sale of the notional dollar value cards is not taxable. When the notional dollar values are redeemed for access to online networks that allow gameplay, interaction among other players on a network, access to digital online content, or the direct download of digital content to a consumer’s device, the redemption of the notional dollar value does not prompt the sales tax because the items listed are not prewritten software and therefore are not subject to the Kansas Retailers’ Sales Tax.

As a general rule, only downloadable prewritten software that is delivered physically or digitally to a Kansas user is subject to the Kansas Retailers’ Sales Tax.

Sincerely,

Mark D. Ciardullo
Tax Specialist

F.M

Date Composed: 03/16/2015 Date Modified: 03/19/2015

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