An Administrative Law Judge for the Utah State Tax Commission released an order on Utah Appeal case 22-1274 upholding the decision of the Utah State Tax Business Taxes and Discovery Division of the Utah State Tax Commission (the Division) to charge a streaming platform (the Taxpayer) sales and use tax on their offerings. During an audit, the Division assessed tax on the subscription fee charged by the Taxpayer citing Utah’s regulations regarding products transferred electronically and the use of bundled transactions. The Taxpayer in this case argued they should not be subject to this tax based on two main arguments: since their main service was streaming, not transferring products, they should not be subject to sales tax, and they could not be considered as bundled transactions because the part of the service that was transferred electronically under Utah regulations was given without charge.
First, Utah repealed SB 2001, which had specifically imposed tax on streaming services, at which point the Taxpayer stopped collecting and remitting tax. SB 2001 established the first tax on streaming services, argued the Taxpayer, and its repeal would end tax for streaming services. However, the Division argued that there should have been tax assessed all along on streaming services, based on the laws regarding electronically transferred products, which do not make a distinction between a permanent use or the right to use for a specified period of time, and do include products that would be subject to tax if the product were transferred in another method.
The Division went further in their argument, claiming even if the streaming services may be non-taxable on their own, the Taxpayer had offered these services with a download option, which is taxable under products delivered electronically, and which, once bundled with the streaming service, would create a bundled transaction that would incur sales tax collection responsibility. To this argument, the Taxpayer claimed the download option was offered at no cost and that this option was such a small part of the offering of the service that it should not require tax on the entire subscription fee.
After considering the options, the Utah Tax Commission offered a decision that, while agreeing with some of the Taxpayer’s arguments, finds the Division was correct to assess tax. The Administrative Judge’s opinion first notes that several Private Letter Rulings support the Taxpayer in this case, and that the Division did not provide sufficient grounds to overturn those rulings. However, though the streaming may be non-taxable on its own, the fact it came bundled with the option to download and watch content offline became the issue of consideration. Under Utah law and the Streamlined Sales and Use Tax (SST) agreement, bundled transactions are taxable if a component would be taxable if sold separately. In this case, the judge found that while the streaming features may be tax exempt, there were features being offered in the subscription price that were taxable, and that the bundled transaction could be taxed. Though the Taxpayer had provided evidence in the form of one press release noting the download features were available at no cost, the judge concluded the Taxpayer did not meet the burden of proof to back up that the taxable services were offered free of cost, noting the benefits for downloading did increase based on what subscription plan was selected. As a result, the Division’s assessment of tax and interest was upheld.
This ruling highlights the importance of clarity in services and record keeping. Since the Taxpayer offered essentially two products – streaming and downloading – they were subject to consideration as a bundled transaction. This kind of distinction is an important one when it comes to taxation, and taxpayers need to take care to be very clear about what they are offering when it comes to application of sales tax. The “bundled transaction” rules are not unique to Utah either – as noted in the ruling, the other SST states treat these bundles similarly, so it is very important to have a clear description of what is being sold, what is being sold together, and the tax implications of combining products. Further, record keeping may have helped in this case if the Taxpayer had been able to provide more evidence to support their claims of offering the additional download capability free of charge. The judge in this case noted multiple times that the burden of proof in this case was on the taxpayer, in part due to multiple rulings which were used to back up the Division’s assessment. Taxpayers making these kinds of arguments should note they will need to support their claims with clear evidence regarding pricing, use, or any other claims rather than relying on press or marketing releases. (Commission Decision, Appeal No. 22-1274, Signed by Jane Phan, Administrative Law Judge, Utah State Tax Commission, September 19, 2023)