Is Nebraska sales and use tax due on digital music, movies, TV shows, e-books, and digital codes delivered electronically?

Plain-English summary

This ruling explains when Nebraska sales and use tax applies to digital products delivered electronically -- downloads and streams of music, movies, TV shows, and books. It supersedes Revenue Ruling 01-08-3 (2008).

The core rule: beginning October 1, 2008, retail sales of digital audio works (music), digital audio-visual works (movies, music videos, TV shows, live events), and digital books are taxable when delivered electronically if the same products would be taxable delivered on tangible media (CD, DVD, etc.). The authority is Neb. Rev. Stat. § 77-2701.16(9), added by Laws 2008, LB 916. Digital codes that give the buyer a right to obtain those products are also taxable.

It doesn't matter how long you get to keep it. The tax applies whether the purchaser receives:

• a permanent right of use (buy-to-own a song or album),
• a right that terminates on a condition (e.g., a movie you can start within 30 days and then watch for a 24-hour window), or
• a right conditioned on continued payments (e.g., a monthly e-book club subscription).

Who is taxed -- "end users." The tax reaches end users of electronically delivered digital goods. The one carve-out: a purchaser operating under an FCC certificate who buys the contractual right or license to rebroadcast the content to the public (by radio, TV, or other means, or where admission is charged) is not an end user. The ruling's example: an artist who buys a master recording electronically is taxed, because the artist isn't buying a rebroadcast license under an FCC certificate -- so no resale exemption.

Digital codes vs. stored value. A "digital code" (however labeled -- song code, video code, book code) is a taxable event when sold, even though the buyer may redeem it for the download later. But a code that represents a stored monetary value drawn down as it's used -- or a redeemable card, gift card, or gift certificate for products of an indicated value -- is not a digital code (and so isn't taxed under this rule at that stage).

What's excluded from the definitions. The ruling is precise about edges: ringback tones and audio greeting cards aren't "digital audio works"; video greeting cards and electronic games aren't "digital audio-visual works"; and periodicals, magazines, newspapers, chat rooms, and blogs aren't "digital books."

What this means for you

Online sellers of music, video, e-books, and digital codes

If you sell electronically delivered music, movies, TV shows, or e-books to Nebraska customers -- or the codes that unlock them -- you generally must collect Nebraska sales tax, provided the equivalent physical product would be taxable. This holds for permanent downloads, time-limited rentals/streams, and subscriptions alike. Sell a redeemable "song code" or "video code"? Tax it at the point of sale, not at redemption. A general-purpose gift card or stored-value card is treated differently -- it's not a digital code.

Buyers and businesses

Expect tax on digital downloads and streaming purchases. You generally can't buy digital content tax-free for resale unless you hold an FCC certificate and are buying the right/license to rebroadcast to the public -- an ordinary business or creator buying a file for its own use owes the tax.

Note on "digital goods" definitions

Not everything digital falls in these buckets. Ringback tones, video greeting cards, electronic games, and news/periodical content are outside the specific definitions the ruling taxes -- check the definitions before assuming a product is (or isn't) covered.

Common questions

Q: When did Nebraska start taxing electronically delivered digital media?
A: October 1, 2008, under Neb. Rev. Stat. § 77-2701.16(9) (Laws 2008, LB 916), for digital products that would be taxable if delivered on physical media.

Q: Is a 24-hour movie rental or a monthly e-book subscription taxable, or only permanent purchases?
A: All are taxable. The tax applies to permanent rights, rights that terminate on a condition, and rights conditioned on continued payments.

Q: Is a redeemable "song code" or "video code" taxed when I buy it or when I redeem it?
A: When you buy it -- the sale of the digital code is the taxable event, even if you download the product later.

Q: Are gift cards and stored-value cards taxed the same way?
A: No. A card representing a stored monetary value drawn down as used, or a gift card/certificate for products of an indicated value, is not a "digital code" and isn't taxed under this rule at that stage.

Q: Can a business buy digital content tax-exempt for resale?
A: Generally no. Only a purchaser operating under an FCC certificate who acquires the right or license to rebroadcast to the public is treated as outside the "end user" definition; an artist buying a master recording for its own use, for example, is taxed.

Citations and references

• Neb. Rev. Stat. § 77-2701.16(9) -- makes specified digital audio works, digital audio-visual works, digital books, and digital codes taxable when delivered electronically (enacted by Laws 2008, LB 916), effective October 1, 2008.
• Laws 2008, LB 916 -- the legislation adding the digital-products provision to the sales tax base.
• Revenue Ruling 01-08-3 -- the earlier digital-media ruling (issued August 25, 2008) that this ruling supersedes.

Source

• Landing page: https://revenue.nebraska.gov/about/legal-information/revenue-rulings-issued-tax-commissioner
• Original PDF: https://revenue.nebraska.gov/sites/revenue.nebraska.gov/files/doc/legal/rulings/rr011103.pdf

Original ruling text

Supersedes Revenue Ruling 01-08-3, issued August 25, 2008
RETAIL SALES OF DIGITAL MEDIA

This guidance document is advisory in nature but is binding on the Nebraska Department
of Revenue (Department) until amended. A guidance document does not include internal
procedural documents that only affect the internal operations of the Department and does
not impose additional requirements or penalties on regulated parties or include
confidential information or rules and regulations made in accordance with the
Administrative Procedure Act. If you believe that this guidance document imposes
additional requirements or penalties on regulated parties, you may request a review of the
document.
This guidance document may change with updated information or added examples. The
Department recommends you do not print this document. Instead, sign up for the
subscription service at revenue.nebraska.gov to get updates on your topics of interest.
Issue
Beginning October 1, 2008, retail sales of:
Digital audio works (music),
Digital audio-visual works (movies, music videos, TV shows, etc.), and
Digital books
are subject to tax when delivered electronically if the products are taxable when delivered on tangible storage media
(see Neb. Rev. Stat. § 77-2701.16(9), pursuant to Laws 2008, LB 916). In addition, retail sales of digital codes that
provide the purchaser with a right to obtain digital audio works, digital audio-visual works, or digital books are subject
to tax. Sales of such digital products are subject to tax when the purchaser receives a permanent right of use, a right
of use which terminates on some condition, or a right of use conditioned upon continued payments. This revenue
ruling provides the rules relating to the taxability of sales of such digital products delivered electronically.
Definitions
Digital audio works. Digital audio works means products that result from the fixation of a series of musical, spoken,
or other sounds. Products within the definition include recorded or live songs, music, readings of books or other
written materials, speeches, and ringtones or other sound recordings. Products which are not within the definition
include ringback tones and other digital audio files that are not stored on the purchaser’s communication device or
audio greeting cards sent by electronic mail.
Digital audio-visual works. Digital audio-visual works means products consisting of a series of related images which,
when shown in succession, impart an impression of motion, together with accompanying sounds, if any. Products
within the definition include movies, motion pictures, musical videos, news and other television programs, and live
events. Products which are not within the definition include video greeting cards or video or electronic games.

Digital books. Digital books means literary works expressed in words, numbers, or other verbal or numerical symbols
or indicia which are generally recognized in the ordinary and usual sense as “books.” The definition includes works of
fiction and nonfiction and short stories. The definition does not include periodicals, magazines, newspapers or other
news or information products, chat rooms, or weblogs.
Digital code. Digital code means a code which provides a purchaser with a right to obtain one or more taxable digital
products delivered electronically. A digital code may be obtained by any means, including email or tangible media,
such as plastic cards or certificates imprinted on other products, regardless of its designation as a “song code,”
“video code,” or “book code.”
End user. End user means any purchaser of digital goods delivered electronically except a person operating under a
certificate from the Federal Communications Commmission (FCC) who receives the contractual right or license to
rebroadcast the digital goods to the general public by radio, television, other means, or where an admission is
charged.
Analysis
Sales and use tax applies to sales of digital audio works, digital audio-visual works, digital books, and digital codes
relating to such products includes sales to end users who receive a right to permanent use of the product, as well as
purchasers who receive less than a right of permanent use. The person must receive the product electronically and
download the item to a computer hard drive or electronic storage device. For example:
An online retailer of music sells music files for a set price per song or album. The purchaser receives the
music through its Internet connection and is allowed to keep the songs permanently on an electronic storage
device. These sales are subject to tax as digital audio works.
An online retailer of movies and TV shows allows purchasers to view selected shows for only a 24-hour period.
The purchaser receives the show through its Internet connection and views the show on an HD television or
computer. Purchasers have 30 days to start watching the show and once it starts, will have 24 hours to finish it
or play it as many times as desired during the 24-hour period. These sales are subject to tax as digital audiovisual works even though the retailer does not authorize the purchaser to permanently retain the movie or
show.
An artist records a song at a recording studio. The artist purchases the master recording from the studio, and
takes delivery of the recording electronically. This transaction is taxable. The artist cannot purchase the
master recording tax exempt, for resale purposes, because the artist is not operating under a certificate from
the FCC with contractual rights, or a license, to rebroadcast the recording to the general public by radio,
television, or other means.
Sales and use tax on sales of digital audio works, digital audio-visual works, digital books, and digital codes relating
to such products applies to end users whose right of use is conditioned upon continued payments. For example:
An online retailer of books sells subscriptions to a book club that provides purchasers with electronic book
deliveries on a monthly basis. The electronic books are received by the purchaser through an Internet
connection and stored on a computer hard drive. Such products constitute digital books and the monthly
charges are subject to tax even though the purchaser’s right of use is conditioned upon continued payments.
The sale of a digital code is a taxable event even though the purchaser may exercise the digital code to take
electronic delivery of the digital product at a later date. A code that represents a stored monetary value that is
deducted from a total as it is used by the purchaser is not a digital code. In addition, a redeemable card, gift card, or
gift certificate that entitles the holder to select digital products of an indicated value is not a digital code.
APPROVED:
Douglas A. Ewald

Tax Commissioner
August 4, 2011