Tax Type
Retail Sales and Use Tax
Description
Seller of coin-operated digital jukeboxes and music services for digital jukeboxes
Topic
Tangible Personal Property
Taxable Transactions
Date Issued
04-17-2008
April 17, 2008
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you request a ruling on behalf of an anonymous client (the "Taxpayer") regarding the application of the retail sales and use tax to music services related to electronic jukeboxes.
FACTS
The Taxpayer sells coin-operated digital jukeboxes and music services for use with digital jukeboxes. The jukebox has a hard drive that is preloaded with songs that can be played by inserting coins into the jukebox. The digital jukeboxes also have hardware and software that allows the jukebox owners ("operators") and their customers to search for and play songs that are accessed from a separate hardware device in the jukebox. The operators and their customers can also search for and play songs that are accessed via the Internet from the Taxpayer's mainframe music database.
The Taxpayer sells various music packages that allow the operators and their customers to play the music loaded on their jukeboxes and to receive music downloads over the Internet. The operator must purchase a music package to allow continued access to songs purchased through the jukebox. Several music packages are available based on different pricing structures. The Taxpayer seeks a ruling on the application of the retail sales and use tax to the music packages and to additional services that it sells to operators.
RULING
Music Service Packages
The Taxpayer sells the following music service packages to operators. All of these packages entitle operators to a fixed number of free music downloads annually.
Fixed Rate. New Fixed Rate Fixed Rate 2006: The Taxpayer charges operators a weekly base fee plus a per play charge each time a song is played.
Ultra 16: The Taxpayer charges operators a weekly base fee plus a percentage of the revenue taken from jukebox song plays.
Elite, New Elite, Fixed Percentage Program: The Taxpayer charges operators a percentage of the revenue taken from jukebox song plays.
Virginia Code § 58.1-603 imposes the retail sales tax on the retail sale, lease or rental of tangible personal property in Virginia. Virginia Code § 58.1-602 defines "retail sale" to mean "a sale to any person . . . in the form of tangible personal property or services taxable under this chapter . . . ." In addition, Virginia Code § 58.1-609.5 1 provides an exemption from the retail sales and use tax for:
-
- Professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made ... and services not involving an exchange of tangible personal property which provide access to or use of ... the Internet and any other related electronic communication service, including software, data, content and other information services delivered electronically via the Internet.
Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 A interprets this exemption and states that charges for services generally are exempt from the retail sales and use tax unless the service is provided in connection with the sale of tangible personal property. The Department has held that transactions involving data accessed on-line by personal computers or the transmittal of information via fax, Internet or other electronic means are nontaxable service transactions.
Based on the information provided, the music packages are provided independent of the sale of the jukeboxes or other tangible personal property. The music packages sold by the Taxpayer allow songs to be selected and played from the library of available song titles located in the operator's jukebox. The music packages also entitle the operators and their customers to select and play song titles that are accessed over the Internet from the Taxpayer's mainframe database of songs. The song titles provided by the Taxpayer via the Internet are not downloaded into tangible form by either the operators or their customers. In each case where an operator or customer selects and plays a song, there is no exchange of tangible personal property.
The music packages are riot one of the taxable services referenced in the definition of retail sale in Va. Code § 58.1-602 and therefore, the charges for the music packages are not retail sales based on Virginia's statutory definition of "retail sale." Based on the personal services exemption cited, the charges for the music packages qualify as nontaxable service transactions. The Taxpayer is not required to collect Virginia sales and use tax on the charges for the music packages at issue.
Additional Services
The Taxpayer sells additional, add-on services that are billed as separate charges to the operators. The additional services are described below.
Additional Song Downloads: The Taxpayer charges operators a separately stated fee for each additional song downloaded onto the jukebox hard drive that exceeds the free number of songs allowed under a particular music package.
Per Play Fee: The Taxpayer charges operators using certain music packages a separately stated fee each time a song accessed from the Taxpayer's Tune Central Database is played by a customer. This charge is absorbed by the operator.
Tune Central: The Taxpayer's music database allows customers to search for and access thousands of songs through a hardware device located in the jukebox. These songs cannot be accessed from the jukebox hard drive. Songs accessed through Tune Central are not downloaded to the operator's jukebox hard drive and copies of the songs are not provided in tangible form after they are played. This is a one-time play option that is paid for by the customer using the jukebox.
Tune Central (Gen III): The Taxpayer allows customers access to a mainframe music database via the Internet. Customers can search for music titles by name, artist, album or genre. The customer makes a selection, inserts coins in the jukebox and the song is played. Songs accessed through Tune Central (Gen III) are not downloaded to the operator's jukebox hard drive and copies of the songs are not maintained in tangible form after they are played. This is a one-time play option that is paid for by the customer using the jukebox.
Background Music: The Taxpayer charges operators a separate fee for this service, which is available with certain music packages. The charge is calculated on a graduated scale based on the percentage of jukebox plays.
Telephone Support: The Taxpayer provides support services that include 24-hour technical telephone support, exchanges of damaged or defective parts, software upgrades in both tangible and intangible formats and on-site field service technicians.
The Taxpayer's charges for additional song downloads, per play fees, Tune Central, Tune Central (Gen III) and background music follow the same tax treatment as the Taxpayer's music packages. The charges for these additional services are nontaxable service transactions. The Taxpayer is not required to collect the Virginia tax on such charges.
The telephone support service offered by the Taxpayer entitles the operators to receive tangible personal property such as replacement parts for the jukeboxes and software upgrades in tangible form. On-site repair services and 24-hour telephone technical support are included with the support service. The telephone support service is a parts and labor maintenance agreement for Virginia sales and use tax purposes. Virginia Code § 58.1-609.5 9 provides, in part, that:
-
- Beginning January 1, 1996, maintenance contracts, the terms of which provide for both repair or replacement parts and repair labor, shall be subject to tax upon one-half of the total charge for such contracts only. Persons providing maintenance pursuant to such a contract may purchase repair or replacement parts under a resale certificate of exemption.
Based on the above, one-half of the total charge for telephone support billed by the Taxpayer to the operators is subject to the 5% Virginia sales and use tax.
Tax Treatment of Service Providers
Title 23 VAC 10-210-4040 E discusses the tax responsibilities of service providers and states the following:
-
- A service provider is the taxable user and consumer of all tangible personal property purchased for use in providing exempt services. If a supplier fails to collect the tax from a service provider, the provider shall remit use tax to the department as provided in 23 VAC 10-210-6030.
As a service provider, the Taxpayer is responsible for paying Virginia sales or use tax on any tangible personal property purchased in Virginia or provided to Virginia operators as part of its music service packages or with the other nontaxable services discussed in this ruling. If the Taxpayer properly pays sales or use tax to another state on such property prior to its use in Virginia, a credit against the use tax due to Virginia is available in accordance with Title 23 VAC 10-210-450.
This response is based on the facts presented as summarized above. Any change in facts or the introduction of new facts may lead to a different result.
The Code of Virginia sections and regulation cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions concerning this ruling, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
-
-
-
-
-
-
-
- Sincerely,
-
-
-
-
-
-
Janie E. Bowen
Tax Commissioner
AR/1-1453887720S
Rulings of the Tax Commissioner