A company sells subscriptions to a library of pre-recorded online training videos, with discussion boards and other features included. Is a monthly or annual subscription to these pre-recorded courses subject to Tennessee sales tax?

Plain-English summary

A company that sells subscriptions to a library of pre-recorded online training videos asked whether those subscriptions are subject to Tennessee sales tax. The Department said yes — and the reason is what makes this ruling useful: the courses are taxed as "specified digital products" (essentially, streaming video), not as software.

The company's subscribers pay a monthly or annual fee for a temporary license to watch an unlimited number of pre-recorded courses created by expert authors. Each course comes with a discussion board where subscribers can ask the author questions and talk to each other, and some courses prepare people for certifications or grant continuing-education credit. Subscribers can stream the videos on any device and even download some materials and an offline viewer during the subscription — but when the subscription lapses, access ends, and the company keeps all the intellectual property.

Tennessee taxes the sale, license, or subscription access to "specified digital products" (§ 67-6-233). "Specified digital products" means electronically transferred digital audio-visual works, digital audio works, and digital books. The pre-recorded video courses are digital audio-visual works — a series of related moving images with sound, transferred electronically — so they're squarely within the definition. And the statute specifically reaches digital products sold with less-than-permanent rights, sold on continued-payment terms, or sold as a subscription — exactly this arrangement.

The company's subscriptions also bundle in extras (discussion boards and other features), some of which might not be taxable on their own. But under the true-object test, those extras aren't "essential" — the Department noted that without the videos, none of the other features would have any value. So the true object is access to the video library, and the whole subscription is taxable.

How this fits with RR 17-17 (online courses). Tennessee has now taxed online learning under two different theories. Pre-recorded video courses are specified digital products (this ruling, § 67-6-233). Interactive self-study courses where you work through a program are remotely accessed software (RR 17-17, § 67-6-231). Live, instructor-led classes, by contrast, are a nontaxable service (RR 17-17). The label "online course" doesn't decide the tax — the nature of the content does.

What this means for you

On-demand video and streaming-subscription businesses

If you sell access to pre-recorded video — training courses, a streaming library, on-demand classes — on a monthly or annual subscription, Tennessee treats that as taxable specified digital products. It doesn't matter that access is temporary, that it ends when payment stops, or that the customer watches later; the statute specifically taxes subscriptions and continued-payment access.

Online education and certification-prep providers

How you deliver the learning controls the tax. Pre-recorded video = taxable specified digital product. Interactive, software-driven self-study = taxable remotely accessed software. Live instructor-led classes = nontaxable service. Many platforms sell all three; you may need to tax some offerings and not others, and be careful with bundles sold for one price.

Businesses that bundle extras with a digital subscription

Adding non-essential extras (discussion boards, community features, downloads) to a digital-product subscription generally won't make the subscription nontaxable. If the digital product is the true object — the thing without which the extras have no value — the whole price is taxable.

Accountants and tax professionals

The hook is § 67-6-233, not § 67-6-231: pre-recorded courses are digital audio-visual works (§ 67-6-102(28)) within "specified digital products" (§ 67-6-102(86)), and § 67-6-233(a)–(b) taxes subscription / less-than-permanent / continued-payment access, sourced to the subscriber's Tennessee address (§ 67-6-233(g)). The bundled extras fail the true-object/essential-element test (Thomas Nelson; AT&T; Rivergate Toyota; Ltr. Rul. 14-10). Compare RR 17-17 (self-study = software under § 67-6-231; live webinar = nontaxable service).

Common questions

Q: Is a subscription to pre-recorded online video courses taxable in Tennessee?
A: Yes. Pre-recorded video courses are "specified digital products" (digital audio-visual works), and Tennessee taxes subscription and continued-payment access to specified digital products under § 67-6-233.

Q: Does it matter that access is temporary and ends when I stop paying?
A: No. The statute specifically taxes specified digital products sold with less-than-permanent rights, conditioned on continued payment, or as a subscription. Temporary access is still taxable.

Q: My subscription includes discussion boards and other features — does that make it nontaxable?
A: No. Those extras aren't the true object. Because the videos are what give the subscription its value, the whole subscription is taxable even if some features might not be taxable on their own.

Q: How is this different from other online courses?
A: Pre-recorded video courses are taxed as specified digital products (§ 67-6-233). Interactive self-study courses are taxed as remotely accessed software (§ 67-6-231; RR 17-17). Live instructor-led classes are a nontaxable service.

Q: Can I rely on this letter ruling?
A: No. A Tennessee letter ruling binds the Department only as to the specific taxpayer and facts it was issued to, and it can be revoked or modified. Confirm your own facts with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.):

• § 67-6-233(a) (retail sale, lease, licensing, or use of specified digital products transferred to or accessed by subscribers or consumers is taxable); § 67-6-233(b)(1)–(3) (taxable forms: rights of less than permanent use; rights conditioned on continued payment; subscriptions, access, or a digital code); § 67-6-233(g) (sourced to the subscriber's Tennessee address)
• § 67-6-102(86) (definition of "specified digital products" — digital audio-visual works, digital audio works, digital books)
• § 67-6-102(28) (definition of "digital audio-visual works"); § 67-6-102(29) (definition of "digital books"; excludes newspapers, magazines, periodicals, chat-room discussions, weblogs)
• § 67-6-102(76) ("retail sale"); § 67-6-102(78)(A), (C) ("sale"); § 67-6-102(89)(A) ("tangible personal property"); § 67-6-102(68) ("prewritten computer software")
• § 67-6-102(90)(A) ("telecommunications service" — example of an enumerated taxable service)

Case law:

• True object / bundling: Thomas Nelson, Inc. v. Olsen, 723 S.W.2d 621 (Tenn. 1987); AT&T Corp. v. Johnson, 2002 WL 31247083 (Tenn. Ct. App. 2002); Rivergate Toyota, Inc. v. Huddleston, 1998 WL 83720 (Tenn. Ct. App. 1998); Tenn. Dep't of Revenue Ltr. Rul. 14-10 (Oct. 14, 2014)

Source

• Landing page: https://www.tn.gov/revenue/tax-resources/legal-resources/tax-rulings.html
• Original PDF: https://www.tn.gov/content/dam/tn/revenue/documents/rulings/sales/17-18.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 17-18

Letter rulings are binding on the Department only with respect to the individual taxpayer
being addressed in the ruling. This ruling is based on the particular facts and
circumstances presented, and is an interpretation of the law at a specific point in time. The
law may have changed since this ruling was issued, possibly rendering it obsolete. The
presentation of this ruling in a redacted form is provided solely for informational purposes,
and is not intended as a statement of Departmental policy. Taxpayers should consult with a
tax professional before relying on any aspect of this ruling.
SUBJECT
Application of Tennessee sales and use tax to pre-recorded online training courses accessed via
monthly subscription.
SCOPE
This letter ruling is an interpretation and application of the tax law as it relates to a specific set of
existing facts furnished to the Department by the taxpayer. The rulings herein are binding upon the
Department, and are applicable only to the individual taxpayer being addressed.
This letter ruling may be revoked or modified by the Commissioner at any time. Such revocation or
modification shall be effective retroactively unless the following conditions are met, in which case
the revocation shall be prospective only:
(A)

The taxpayer must not have misstated or omitted material facts involved in the
transaction;

(B)

Facts that develop later must not be materially different from the facts upon
which the ruling was based;

(C)

The applicable law must not have been changed or amended;

(D)

The ruling must have been issued originally with respect to a prospective or
proposed transaction; and

(E)

The taxpayer directly involved must have acted in good faith in relying upon the
ruling; and a retroactive revocation of the ruling must inure to the taxpayer’s
detriment.
FACTS

[TAXPAYER] (the “Taxpayer”) has been in business since [YEAR] and is principally engaged in
providing access, via subscription, to online [REDACTED] training courses. The Taxpayer developed

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the courses through its network of authors comprised of experts in various [REDACTED] disciplines
(the “authors”). The Taxpayer’s online [REDACTED] training courses primarily focus in the fields of
[REDACTED]. The Taxpayer created a virtual classroom that allows people to learn, teach, and
connect. The Taxpayer's subscribers are able to enhance existing, or obtain new, [REDACTED] skills
enabling them to improve their careers and productivity.
To provide a high-quality educational experience to subscribers, the Taxpayer contracts with the
authors who create pre-recorded training courses on their topic [REDACTED] of expertise. The
courses all come with access to a course-specific discussion board that allows the subscriber to
interact with the course instructor and other subscribers. The authors often respond quickly,
sometimes within minutes, of receiving a question on the discussion boards. [REDACTED].
Additionally, there is also interaction between subscribers.
The Taxpayer's subscribers are divided into [REDACTED] groups: [REDACTED]. [REDACTED].
Several of the Taxpayer’s courses help prepare subscribers for active certifications issued by various
businesses. Other courses provide continuing education units or professional development units for
the subscribers who complete the courses.
Subscribers are granted a temporary license to access the Taxpayer's complete course library for a
monthly or annual fee (the “Subscription”). Subscribers may view an unlimited number of courses
during the Subscription period. The Taxpayer retains 100% of the intellectual property rights related
to these courses, and subscribers are prohibited from retaining, storing or redistributing any of the
training accessed via their Subscriptions.
Subscribers can access the online courses via any device that connects to the Internet via an Internet
browser or that can access the appropriate viewing app. During their Subscription period,
subscribers can also download content for certain training courses, including exercise files, course
slides, and sample code. Subscribers can also download a free viewer that enables them to
temporarily download and view training videos offline during the Subscription period. Once the
Subscription period ends, the Subscribers’ access to video learning content is terminated and they
must renew their Subscription in order to regain access to the educational material.
The Taxpayer offers [REDACTED] Subscription plans: [REDACTED]. The subscribers primarily use the
Taxpayer’s service offerings to expand their knowledge with the expert content contained in the
course library as well as the ability to communicate with the course authors and other subscribers
via an interactive discussion board. However, each Subscription comes with additional features that
Taxpayer provides at no additional charge and is included in the Subscription fee. For example:
•

[REDACTED – FREE FEATURES]

The [REDACTED] plans contain additional features [REDACTED] than the [REDACTED] plan. The
[REDACTED] plan, which is a multi-learner package, comes with all of the features mentioned above
as well as: [REDACTED – ADDITIONAL FEATURES].
Finally, the [REDACTED] plan contains, in addition to the [REDACTED] package features: [REDACTED –
ADDITIONAL FEATURES].

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RULING
Are the Taxpayer’s Subscriptions to pre-recorded online [REDACTED] training courses subject to
Tennessee sales and use tax?
Ruling: Yes, the Taxpayer’s Subscriptions to pre-recorded online [REDACTED] training courses are
subject to Tennessee sales and use tax under TENN. CODE ANN. § 67-6-233.
ANALYSIS
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Under the Retailers’ Sales Tax Act, the retail sale in Tennessee of tangible personal property and
specifically enumerated services is subject to the sales tax, unless an exemption applies. “Retail sale”
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is defined as “any sale, lease, or rental for any purpose other than for resale, sublease, or subrent.”
TENN. CODE ANN. § 67-6-102(78)(A) defines “sale” in pertinent part to mean “any transfer of title or
possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by
any means whatsoever of tangible personal property for a consideration.” “Tangible personal
property” includes “property that can be seen, weighed, measured, felt, or touched, or that is in any
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other manner perceptible to the senses.” The sales tax also applies to retail sales of services
4
specifically enumerated in the Retailers’ Sales Tax Act.
Additionally, the term “sale” includes “the furnishing of any of the things or services” taxable under
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the Retailers’ Sales Tax Act. One of the “things” specifically taxable is the “retail sale, lease, licensing
or use of specified digital products transferred to or accessed by subscribers or consumers” in

1

Tennessee Retailers’ Sales Tax Act, ch. 3, §§ 1-18, 1947 Tenn. Pub. Acts 22, 22-54 (codified as amended at TENN. CODE ANN.
§§ 67-6-101 to -907 (2013)).
2

TENN. CODE ANN. § 67-6-102(76)(Supp. 2015).

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TENN. CODE ANN. § 67-6-102(89)(A). Tangible personal property also includes “prewritten computer software,” which is
defined in TENN. CODE ANN. § 67-6-102(68) in pertinent part as “computer software, including prewritten upgrades, that is not
designed and developed by the author or other creator to the specifications of a specific purchaser.”
In 2015, the Tennessee General Assembly adopted into law 2015 Tenn. Pub. Acts Ch. 514, § 22 (effective July 1, 2015). This law
effectively treats all purchases of computer software in this state equally, regardless of how the software is provided to and
used by a purchaser in this state. It amends TENN. CODE ANN. § 67-6-231(a) to include subdivision (2), which states in pertinent
part that: “[f]or purposes of subdivision (a)(1), “use of computer software” includes the access and use of software that
remains in the possession of the dealer who provides the software or in the possession of a third party on behalf of such
dealer. If the customer accesses the software from a location in this state as indicated by the residential street address or the
primary business address of the customer, such access shall be deemed equivalent to the sale of licensing of the software
and electronic delivery of the software for use in the state.”
4

For example, the furnishing of “intrastate, interstate or international telecommunication services” is one such specifically
enumerated service. “Telecommunications service” is defined by TENN. CODE ANN. § 67-6-102(90)(A) as the “electronic
transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals to a point, or between or
among points.”
5

TENN. CODE ANN. § 67-6-102(78)(C).

3

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Tennessee. The term “specified digital products” is defined in TENN. CODE ANN. § 67-6-102(86) as
“electronically transferred digital audio-visual works, digital audio works and digital books.” Specified
digital products include “electronically transferred digital audio-visual works, digital audio works and
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digital books.” Digital audio-visual works are “a series of related images that, when shown in
succession, impart an impression of motion, together with accompanying sounds, if any, that are
transferred electronically” and include “motion pictures” as well as “news and information
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programs.” Digital books are “works that are generally recognized in the ordinary and usual sense
as ‘books’ that are transferred electronically, including works of fiction and nonfiction and short
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stories.”
Finally, whenever two or more items are sold for a single sales price and at least one of the items is
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subject to sales tax, the entire sales price is subject to sales tax as a bundled transaction. When a
transaction involves taxable and nontaxable components and the transaction’s true object or a
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12
13
14
15
“crucial,” “essential,” “necessary,” “consequential,” or “integral” element of the transaction is
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subject tax, the entire transaction is subject to sales tax. Only if the true object of the transaction is

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TENN. CODE ANN. § 67-6-233(a) (Supp. 2015).

7

TENN. CODE ANN. § 67-6-102(86).

8

TENN. CODE ANN. § 67-6-102(28).

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TENN. CODE ANN. § 67-6-102(29). The definition of “digital books” excludes “newspapers, magazines, periodicals, chat room
discussions [and] weblogs. TENN. CODE ANN. § 67-6-102(29).
10

See generally Tenn. Dept. of Rev. Ltr. Rul. 14-10 (Oct. 14, 2014) [hereinafter “Ltr. Rul. 14-10”] (discussing Tennessee law
regarding bundling and the “true object” test), available at http://www.tennessee.gov/assets/entities/revenue/attachments/1410.pdf.

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See, e.g., Thomas Nelson, Inc. v. Olsen, 723 S.W.2d 621, 624 (Tenn. 1987) (holding that a transaction involving the sale of nontaxable intangible advertising concepts was nevertheless subject to sales tax on the entire amount of the transaction because
advertising models, which were tangible personal property, were an “essential,” “crucial,” and “necessary” element of the
transaction).

12

Id.; see also AT&T Corp. v. Johnson, No. M2000-01407-COA-R3-CV, 2002 WL 31247083, at *8 (Tenn. Ct. App. Oct. 8, 2002)
(holding that a transaction involving the sale of engineering services along with separately itemized tangible
telecommunications systems was subject to sales tax on the entire amount of the contract because “equipment, engineering,
and installation combine in this instance to produce BellSouth's desired result: a functioning item of tangible personal
property assembled on the customer's premises,” and further describing the engineering services as “‘essential’” and
“‘integral’” to the sale of tangible personal property).
13

See supra note12.

14
See Rivergate Toyota, Inc. v. Huddleston, No. 01A01-9602-CH-00053, 1998 WL 83720, at *4 (Tenn. Ct. App. Feb. 27, 1998)
(holding that a transaction involving the commission and distribution of advertising brochures was subject to sales tax on the
“‘entire cost of the transaction’” because, although the transaction involved a number of services, the brochures themselves
“were not inconsequential elements of the transaction but, in fact, were the sole purpose of the contract”).
15

See AT&T Corp. v. Johnson, 2002 WL 31247083, at *8.

16

See generally Ltr. Rul. No. 14-10, supra note 10.

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not independently subject to sales tax and the items that would be subject to sales tax are “merely
17
incidental” to the true object of the transaction will the transaction not be subject to sales tax.
The true object of the Taxpayer’s Subscriptions is access to specified digital products and, as such, is
subject to the Tennessee sales and use tax under TENN. CODE ANN. § 67-6-233.
Under TENN. CODE ANN. § 67-6-233(a), the “retail sale, lease, licensing or use of specified digital
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products transferred to or accessed by subscribers or consumers” in Tennessee is subject to the
Tennessee sales and use tax. Taxable retail sales, leases, licensing, or use of specified digital
products include: “[s]pecified digital products sold with rights of less than permanent use; [s]pecified
digital products sold with rights of use conditioned upon continued payment by the subscriber or
purchaser; and [s]ubscriptions to, access to or the purchase of a digital code for receiving or accessing
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specified digital products.”
First, the Taxpayer provides the customer with access to specified digital products, which are
defined to include “electronically transferred digital audio-visual works, digital audio works and
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digital books.” Here, the subscribers pay a monthly or yearly fee in exchange for continuing access
to the Taxpayer’s entire library of pre-recorded courses. These pre-recorded courses are digital
audio-visual works, which is a type of specified digital product.
Second, the Subscription constitutes a retail sale, lease, licensing, or use of specified digital products
as described in TENN. CODE ANN. § 67-6-233(b)(1)-(3). Here, subscribers pay a yearly fee in exchange
for continuing access to the entire pre-recorded course library, which contain numerous specified
digital products. This type of transaction is properly described as a “subscription” or a sale “with
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rights of use conditioned upon continued payment by the subscriber.”
Finally, although other services are included in the Subscriptions, many of which may not be
otherwise subject to Tennessee sales and use tax, none of those additional services are essential or
crucial elements of the Subscription. Without the subscriber being able to first learn the new or
additional skills via watching the pre-recorded online videos, none of the other service offerings
would be of any value to the subscriber. The true object, therefore, is access to the course library.
Accordingly, the Taxpayer’s Subscriptions are subject to the Tennessee sales and use tax under
TENN. CODE ANN. § 67-6-233 as the sale of access to specified digital products.

17

See generally id.

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The tax applies to retail sales in Tennessee, “indicated by the residential street address or the primary business street
address of the subscriber or consumer.” TENN. CODE ANN. § 67-6-233(g).

19

TENN. CODE ANN. § 67-6-233(b)(1)-(3) (emphasis added).

20

TENN. CODE ANN. § 67-6-102(86).

21
See TENN. CODE ANN. § 67-6-233(b)(1)-(3). Because the Subscription constitutes a subscription to specified digital products,
the fact that the customer accesses the specified digital products at some future point following payment of the annual
membership fee is inconsequential to the application of the sales and use tax.

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Brent C. Mayo
Assistant General Counsel

APPROVED:

David Gerregano
Commissioner of Revenue

DATE:

11/6/17

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