Are the various fees a jukebox company charges its jukebox operators for music downloads, database access, background music, and telephone support subject to Utah sales and use tax?

Plain-English summary

A company in the electronic jukebox and music-service business sold digital jukeboxes preloaded with songs to "Operators" who placed them for coin-operated play by end customers. It charged Operators under several music service packages -- flat weekly base fees plus per-play charges, weekly base fees plus a percentage of coin revenue, or pure percentage-of-revenue plans -- along with separately stated charges for extra song downloads beyond an annual free allotment, access to its "Tune Central" one-time-play music database (in-jukebox and online versions), background music, and telephone technical support (which bundled nontaxable phone help with taxable parts exchange and software upgrades). The company asked whether Utah sales and use tax applied to each of these nine charge types.

The digital music itself is taxable tangible personal property, consumed by the Operator. Digital music qualifies as tangible personal property under Utah law as prewritten computer software or computer-generated output (§ 59-12-102(92); Utah Admin. Rule R865-19S-92(D)). The key question was whether the Operator buys this music for resale to its customers (exempt) or consumes it itself to run its entertainment business (taxable). Drawing on a prior ruling about coin-operated amusement devices (PLR 95-010), the Commission concluded the music packages are analogous to the jukebox itself: the Operator isn't reselling tangible property to its customers, but consuming the music (and the jukebox) to provide an entertainment service. So charges for the music are taxable to the Operator, the same as the jukebox purchase itself.

Each package category, applying that framework:

• Fixed Rate / Ultra 16 / Elite programs (base fee and/or revenue-percentage plans): All taxable, on the full charged amount (base fee plus per-play or percentage charges), because they're payment for music the Operator consumes.
• Additional song downloads ($1.50/song over the free allotment): Taxable, same reasoning as the base packages.
• Tune Central database access (in-jukebox and online "Gen III" versions): Taxable. Although a pure database-search-access charge is generally not taxable if nothing downloads to the customer's own device, here the song is still downloaded onto the jukebox system for a single play, and the customer controls when it plays -- close enough to the other taxable charges to be taxed the same way.
• Background music: Depends on control. If the background music runs like a typical piped/satellite service that the Operator does not directly control, it's traditionally treated as a nontaxable service. But if the Operator can control and change it at will, the underlying music itself is treated as taxable rather than an exempt service -- the Commission found the facts weren't clear enough to say definitively which applies here.
• Telephone support: The 24-hour phone help itself is a nontaxable service, but the same package also includes damaged/defective parts exchange (taxable repair) and software upgrades (taxable tangible personal property). If the taxable and nontaxable pieces aren't separately stated on the charge, the entire bundled transaction becomes taxable.

What this means for you

Jukebox, arcade, and coin-operated amusement device operators/vendors

If you sell or lease amusement devices and separately charge for digital content consumed by the device operator (music, game content, etc.), expect that content to be taxed the same way as the device itself -- the "resale" exemption generally won't apply because the operator is treated as consuming the content to run an entertainment service, not reselling tangible property.

Digital content and SaaS-adjacent vendors selling to intermediary "operators"

Pure database-access charges can be exempt if nothing is downloaded to the end user's own device -- but if your system downloads content onto intermediate hardware you control (like a jukebox), even for temporary or single-use play, that can be enough to make the charge taxable.

Businesses bundling taxable and nontaxable services (like tech support + parts)

Always separately state nontaxable service charges (like phone support) from taxable charges (like parts exchange or software upgrades) on the same invoice. Bundling them together without itemization causes the whole transaction to be taxed.

Common questions

Q: Are digital music download fees to jukebox operators taxable in Utah?
A: Yes. The Commission treats the music as tangible personal property consumed by the operator to run its entertainment business, not resold to end customers, so it's taxable the same way the jukebox itself is.

Q: Is charging for access to a music database (without downloading to the customer's device) taxable?
A: It depends on whether the content is downloaded anywhere in the vendor's system. Pure access-only charges with no download are generally not taxable, but here the song still downloaded onto the jukebox for a single play, which the Commission found sufficient to make the charge taxable.

Q: Is background music taxable?
A: It depends on control. Background music the operator doesn't directly control (like a typical piped/satellite feed) has traditionally been treated as a nontaxable service; music the operator can control and change is treated as taxable content.

Q: If I bundle a nontaxable service with a taxable one on the same charge, is the whole thing taxable?
A: Yes, unless the taxable and nontaxable portions are separately stated on the bill.

Q: Does this ruling apply to my jukebox or amusement device business?
A: No. It binds the Commission only for the requesting taxpayer and the facts described, and can't be relied on by another taxpayer, though it illustrates how the Commission applies the consumption-vs-resale framework to similar digital content businesses.

Citations and references

Statutes and rules:

• § 59-12-103(1)(a), (g), (l) (tax on retail sales, repair services, and use/consumption of tangible personal property)
• § 59-12-102(92) (definition of tangible personal property, including prewritten computer software)
• § 59-12-102(73) (definition of repair or renovation)
• Utah Admin. Rule R865-19S-92(D) (computer-generated output taxability)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/07-002.pdf

Original ruling text

REQUEST LETTER

March 20, 2007

07-002

NAME
ADDRESS
PHONE

Dear TP REP

Subject: Application of Utah Sales Tax Related to Music and Service

My client (“Taxpayer”) is in the electronic jukebox and music service business. Simply,
Taxpayer sells digital jukeboxes to its customers (“Operators”) that contain a hard drive pre-
loaded with thousands of songs available for play by customers upon inserting a coin into the
jukebox. Additional songs can be downloaded via the Internet onto the hard drive. Charges by
Taxpayer for the music on each jukebox, whether on the hard drive at the time of the sale of the
jukebox, or downloaded at the request of the Operator or customer, are based on a variety of
music service packages as noted below. Technical support service is included with the purchase
of each jukebox at no charge to Operators.

Music Service Packages:

     A.    Fixed Rate, New Fixed Rate, Fixed Rate 2006 – Operators are charged a weekly
           base fee of $12.95 plus $0.04 each time a song is played (“per play”). Operators
           are entitled to a fixed number of free music downloads annually.

     B.    Ultra 16 – Operators are charged a weekly base fee of $12.95 plus 16% of
           revenue from the total coinage (intake). Operators are entitled to a fixed number
           of free music downloads annually.

     C.    Elite, New Elite, Fixed Percentage Program – there is no base fee on these plans.
           Operators are charged between 20% and 23% revenue on total coinage (intake),
           depending on the plan. Operators are entitled to a fixed number of free music
           downloads annually.

Separately Stated and Charged For Additional Services:

     D.    Additional Song Downloads – In each of the music service packages noted above,
           existing Operators are entitled to a fixed number of free music downloads
           annually. Should Operators exceed their free annual download allotment, they
           will incur a separately stated charge of $1.50 for each additional song
           downloaded onto the hard drive.
     E.    Per Play Fee (Tune Central) – Operators electing the Fixed Rate, Elite, Ultra16,

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           and/or Fixed Percentage music packages may incur a separately stated charge for
           each “per play fee.” A per play is a charge incurred each time a song, accessed
           from Taxpayer’s Tune Central” database, is chosen and played by a customer. The
           fees differ whether Tune Central is leased or purchased. This charge is never
           passed on to the customer, but absorbed by the Operator.
   F.      Tune Central – Taxpayer’s music access database allows a customer to access said
           database to search thousands of music titles by name, artist, or album. Customers
           perform the search, make their selection, and insert coins to have their song
           played. While the song is accessed from the database (entity within the jukebox
           body) it is never downloaded to the Operators hard drive. No copies (either hard
           or digital) are maintained by the Operator after the play has been completed. This
           is a one-time play option and a separate charge or credit is used by the customer
           each time the customer searches, and chooses to play a song.
   G.      Tune Central (Gen III – taxpayer’s on-line music access database allows a
           customer to access the main frame database (the Internet) to search for music
           titles by name, artist, album, or genre. A selection is made, coins are inserted and
           a song is played. It is not downloaded onto the Operators hard drive, and no
           copies are maintained after the play has been completed. This is a one-time play
           option and a separate charge or credit is used by the customer each time the
           customer searches, and chooses to play a song.
   H.      Background Music – Background music is a separately charged for service
           available with the Ultra 16, Elite, New Elite and Fixed Percentage Plan music
           packages. The charge is calculated on a graduated rate based on the percentage of
           total Jukebox plays. This charge is never passed on to the customer, but absorbed
           by the Operator.
   I.      Telephone support – Telephone support services provide Operators twenty-four
           hour technical telephone support, an exchange of damaged or defective parts
           and/or any applicable software upgrades (in both tangible and intangible format),
           and on-site field service technicians.

Question:

We understand that the sale and lease of the jukebox is subject to Utah sales tax. Our question is,
will Utah require Taxpayer to collect and remit sales tax, or self-assess use tax on the following
music service packages and/or separately stated and charged for additional services, as described
above:

   A.      Fixed rate, New Fixed Rate, Fixed Rate 2006
   B.      Ultra 16
   C.      Elite, New Elite, Fixed Percentage Program
   D.      Additional Song downloads
   E.      Per Play Fee
   F.      Tune Central
   G.      Tune Central Gen III
   H.      Background Music
   I.      Telephone Support

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Thank you for your assistance with this issue. Because Taxpayer wishes to correctly comply with
its Utah sales tax collection and remittance obligation, your attention to this matter is greatly
appreciated.

If you have any questions, or require further information, please contact me directly at PHONE.

Best Regards,

NAME
ADDRESS

                                  RESPONSE LETTER

May 30, 2007

NAME
ADDRESS

RE: Private Letter Ruling 07-002
Application of Sales and Use Tax to Music Downloads and Other Related Services
Dear NAME,

    We have received your letter requesting a ruling regarding the applicability of Utah sales

and use tax to a variety of music service packages that your client, henceforth “Taxpayer,”
provides to its customers. You noted correctly that the sale and lease of the jukebox is subject to
Utah sales tax. However, you asked whether the Utah sales and use tax is applicable to nine
different transactions related to the various music service packages, and whether Taxpayer
should collect and remit sales tax, or self-assess use tax.

    It should be noted that the ruling in this letter is not intended to be a statement of broad

Tax Commission Policy. It is an interpretation of the tax law as it relates to the facts presented in
your request letter and the assumptions stated in this ruling. If the facts or assumptions are not
correctly described in this ruling, please let us know so we can assure a more accurate response
to your circumstances.

                                          FACTS

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    You stated the following facts in your request letter. Taxpayer is in the electronic jukebox

and music service business. It sells electronic jukeboxes to its customers (“operators”) and these
jukeboxes contain a hard drive pre-loaded with songs available for play by customers upon
inserting a coin into the jukebox. Taxpayer also allows music to be downloaded via the Internet.
Depending on the specific services, some downloads are directly onto the jukebox hard drive,
while others are for one-time listening only and are accessed from the operator’s database.

    Taxpayer charges for the music already on the hard drive or downloaded via the Internet

based on a variety of music service packages. The request letter outlined the various music
service packages provided and the charges that Taxpayer collects. The letter also notes that
Taxpayer provides technical support service, which is included with the purchase of each
jukebox, at no charge to operators.

                                          APPLICABLE LAW
     Utah Code Ann. §59-12-103(1) imposes tax on the following transactions, “(a) retail sales of tangible

personal property made within the state; (g) amounts paid or charged for services for repairs or renovations of
tangible personal property…;(l) amounts paid or charged for tangible personal property if within this state the
tangible personal property is: (i) stored; (ii) used; or (iii) consumed…”

     Section §59-12-102(92) defines tangible personal property to include “(a)…personal property that: (i)

may be: (A) seen; (B) weighed; (C) measured; (D) felt; or (E) touched; or (ii) is in any manner perceptible to the
senses.” Tangible personal property includes “(b)(v) prewritten computer software.”

      Under §59-12-102(73) a repair or renovation as “(a) a repair or renovation of tangible personal property

that is not permanently attached to real property; or (b) attaching tangible personal property to other tangible
personal property if the other tangible personal property to which the tangible personal property is attached is not
permanently attached to real property.”

    In addition, Tax Commission Administrative Rule R865-19S-92 states, “(D) The sale of computer

generated output is subject to the sales or use tax if the primary object of the sale is the output and not the services
rendered in producing the output.”

                                                ANALYSIS

     Your letter stated that the actual sale or lease of the electronic jukebox is subject to Utah

sales and use tax and the Tax Commission concurs with that statement. The questions raised in
the letter refer to the applicability of Utah sales and use tax to the nine different music packages
provided by Taxpayer to its customers. Each package is addressed separately below.

    However, before specifically addressing the individual packages, we will make a general

observation in order to provide some background and a broader context. As stated in your letter,
the product you provide to the operators consists essentially of digital musical packages. This
music is considered tangible personal property in the form of prewritten computer software or
computer generated output. (Rule R865-19S-92) However, a question arises as to whether the
charges are for tangible personal property purchased for resale or for consumption by the
operator. The Tax Commission previously addressed this issue in Private Letter Ruling 95-010,
which dealt with purchases of amusement devices. “The resale exemption…would be applicable
if the charges for use of the [amusement] devices constitute charges for the rental or lease of
tangible personal property….The fees or charges for the use of the subject amusement devices,

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however, are not being taxed for the sale, rental, or lease of tangible personal property.”
(Emphasis added) That letter went on further to clarify that”[p]urchases of coin-operated or
other amusement devices for the purpose of generating revenue from admissions or use fees are
purchases at retail.”

    Although that letter corresponds more directly to the treatment of the jukebox itself, we

consider the music packages to be similar in that they are part of , or incorporated into, an
amusement device (the jukebox). The Tax Commission does not view the transactions as
purchases of tangible personal property from Taxpayer, which the operator then resells to its
customers. Rather we consider the operator to be purchasing tangible personal property (the
digital music packages or downloads) from Taxpayer for the purpose of providing an
entertainment service to its customers. Thus the operator is deemed to be consuming tangible
personal property in providing this service just as it is consuming the jukeboxes.

   With this overview, we now address each of the distinct packages outlined in your

request letter.

A. Fixed Rate, New Fixed Rate, Fixed Rate 2006. For this package, the operator is charged
a weekly base fee of $12.95 plus $0.04 each time a song is played. A fixed number of
free music downloads is included annually.

   The amounts you charge these operators for the music that is played on the jukebox are
   for tangible personal property that is consumed by the operator. These charges are subject
   to sales tax. The amount subject to tax would be the weekly base fee of $12.95 plus
   $0.04 each time the song is played.

     These charges are for the music that is played by the jukebox. This music is considered

tangible personal property in the form of prewritten computer software or computer
generated output. (Utah Administrative Rule R865-19S-92) However, a question arises as to
whether the charges are for tangible personal property purchased for resale or for
consumption by the operator. The Tax Commission in Private Letter Ruling 95-010
previously addressed this issue. “The resale exemption…would be applicable if the charges
for use of the devices constituted charges for the rental or lease of tangible personal property
which are taxable under [Utah Code Section §59-12-102(1)(k)]. The fees or charges for the
use of the subject amusement devices, however, are not being taxed for the sale, rental, or
lease of tangible personal property.”

       These charges are for music that is consumed by the operator of the jukebox and are

subject to sales tax. Tax would be due on the operator’s purchase of the songs. The amount
subject to tax would be the weekly base fee of $12.95 plus $0.04 each time the song is
played.

B. Ultra 16. Here the operator is charged a weekly base fee of $12.95 plus 16% of the
revenue from the total coinage intake. A fixed number of free music downloads is
included annually. The answer for this package is the same as A above.

C. Elite, New Elite, Fixed Percentage Program. In this program there is no base fee. The

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    operator is charged between 20% and 23% of the total revenue coinage intake. A fixed
    number of free music downloads is included annually. The answer for this package is the
    same as A. above.

    The following are separately stated charges:

 D. Additional Song Downloads. This is a charge of $1.50 for each song downloaded after
    the operator has exceeded its free annual download allotment. This is a charge in the
    same nature as the above charges and the answer to A is applicable.

 E. F. & G. Tune Central. These three services are interrelated. They differ from the previous
    services in that the song is not downloaded onto the operator’s jukebox hard drive.
    Instead, within the guidelines of the program purchased, the operator’s customer may
    look for a song that is not currently on the operator’s hard drive. This is available if the
    operator has purchased or leased Tune Central. This provides the customer with access to
    taxpayer’s complete music access database. A song is accessed directly through the
    jukebox entity and played one time. Taxpayer makes a charge to the operator for this
    service.

         In the past, the Tax Commission has ruled that a charge to simply access a database is
 not taxable if items are not downloaded onto the customer’s computer. However, in this case,
 even though the item is not downloaded onto the hard drive, it appears that it is downloaded
 onto the jukebox system for the single play. Because the customer has control of when the
 song will be played, the charge is like the ones on the above items and is taxable.

 H. Background Music. This is a separate charge for service available with certain of the
    above packages. The charge is based on a graduated rate based on the percentage of total
    jukebox plays. Generally, if background music is provided on a piped or satellite system,
    it has been considered a service and is not taxable. However, it is not clear from the
    request letter whether the background music is in direct control of the operator so that the
    operator can change it as it pleases or whether it is preloaded into the jukebox and the
    operator has no control over it. If background music is controlled directly by the
    operator, then it is not taxable. Otherwise, taxes are due on the background music.

I. Telephone Support Services. This provides operators with twenty-four hour telephone
support. It also provides exchange of damaged or defective parts and/or any applicable
software upgrades and on-site field service technicians. The telephone support is a
nontaxable service; however, the parts exchange is a charge for repair of tangible personal
property and the software upgrades are purchases of tangible personal property. These are
taxable transactions. It is not clear from your letter if the two transactions are separately
stated. If the nontaxable and taxable charges are not separately stated, the entire transaction
is taxable.

                                      CONCLUSION

     Based on the analysis provided above and in line with the facts stated in your request

letter, our ruling is as follows:

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     1. The charges under music service packages A, B and C are subject to sales and use
        tax;

     2. With respect to the separately stated charges D, E, F, and G, sales and use tax are
        applicable because the charges are in the same nature as packages A, B and C.

     3. Depending on the way the background music is provided to the Operator, tax may be
        due.

     4. The telephone support services appear to cover both taxable (exchange of damaged or
        defective parts and software upgrades) and nontaxable (twenty-four hour telephone
        support) charges. If the two transactions are not separately stated, the entire
        transaction is taxable.

     Our ruling is based on the facts you presented. Should the facts be different from those

represented in this letter, our opinion may change accordingly. Thank you for your inquiry into
this matter.

Marc B. Johnson
Commissioner

MBJ/BA
07-002