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Taxation of
Digital Goods
Alabama Department of Revenue
Sales, Use and Rental Tax Levy
Sales and Use Tax Levy
◦ Sales tax is imposed on the retail sale of tangible personal property sold in
Alabama by a business located in Alabama.
◦ Use tax is imposed on tangible personal property brought into Alabama for
storage, use, or consumption in the state.
Rental Tax Levy
◦ Rental tax is levied upon each person, firm, or corporation engaged in the
business of leasing or renting tangible personal property.
Tangible Personal Property Definition
In accordance with Section 40-12-220 (8) of the Rental Tax Levy:
• Tangible personal property is defined as personal property which may be
seen, weighed, measured, felt or touched, or is in any other manner
perceptible to the senses.
• The definition is found in rental tax law, however the definition is not found
in sales and use tax law, although mentioned within the levy.
Case Laws Upholding TPP Definition for Sales Tax
Curry v. Alabama Power Co., 127 So.2d 521 (Ala. 1942)
◦ The Alabama Supreme Court applied an almost identical definition in holding
that electricity, i.e., the flow of electrons, constituted tangible personal property
for sales and use tax purposes
◦ The Court later confirmed that holding in the following two cases:
◦ State v. Television Corp., 127 So.2d 603 (Ala. 1961)
◦ Sizemore v. Franco Distributing Co., Inc., 594 So.2d 143 (Ala. Civ. App. 1991)
Mode of Delivery Does Not Affect Taxability
ROBERT SMITH d/b/a as FlipFlopFoto v. State of Alabama Department of Revenue
Docket No S 05-1240
◦ The Administrative Law Judge held the following:
◦ “Alabama’s broad definition of tangible personal property, which the Alabama Supreme Court
has construed to include electricity, is sufficiently broad to include digital goods transmitted by
electrical impulses. I also see no principled reason why the retail sale of goods that can now be
delivered electronically due to advances in technology, i.e., photographs, music, movies, books,
etc., should by taxed any differently than the sale of those goods delivered by traditional means.”
Digital Goods & Current Sales and Use Tax Remittance
Tax is currently being remitted on the following items:
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Digital Artwork (purchased rights to print)
“Canned” Software
Digital Magazines and Newspapers
Digital Photographs
Downloaded apps
Downloaded movies
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Downloaded podcasts
Downloaded ringtones
Downloaded TV series
E-books
Electronic greeting cards
Music downloads
2015 Proposed Amendment to Rule 810-6-5-.09
810-6-5-.09 Leasing and Rental of Tangible Personal Property
◦ Clarification as to who/what was subject to rental tax:
◦ Cable or satellite television providers, on-line movie and digital music providers, app stores and other similar providers of
digital transmissions engaged in the business of leasing tangible personal property.
◦ Digital Transmissions, such as “on demand” movies, steaming video/audio, and other similar programs made available to
customers, regardless of the method of transmission, whether rented by subscription for a definite or indefinite period, or on
an on-demand basis.
◦ Clarification as to who/what was not subject to rental tax:
◦ Monthly cable television subscriptions whereby the customer must view pre-set programming, on the providers pre-set
schedule.
◦ Cable television boxes that are used to access basic cable services.
◦ Provided that amendments regarding digital transmissions would not be retroactive but rather effective for
taxable transactions occurring on or after October 1, 2015.
2015 Proposed Amendment to Rule 810-6-5-.09
810-6-5-.09 Leasing and Rental of Tangible Personal Property
◦ Opponents of the rule suggested the amendment to the rule was a new tax levy.
◦ The ruled amendment was subsequently withdrawn from the APA process per the request of
members of the Legislative council.
House Bill 349/Senate Bill 345 of 2016 Regular Session
◦ Provided an exemption from rental, sales and use tax for “product transferred electronically” if
those products are acquired with less than the right of permanent use granted by the seller or use
which is conditioned upon continued payment.
◦ “Product transferred electronically” was defined as a property or a service obtained by the
purchaser by means other than a tangible storage media. The term included:
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Video programming services, including subscription video services
Video-on-demand television services
Broadcasting services
And content to provide the above listed services
Digital video products
Digital audio products
Issues with HB349 and SB345 of 2016 Regular Session
◦ These electronically transferred products that are currently subject to rental tax would now be
exempt:
◦ Movie rentals, movies-on-demand
◦ Streaming audio and video
◦ Equivalent digital items of tangible items currently taxed
◦ Established taxpayer inequality between in-state store front businesses versus those who are
internet based. This puts in-state businesses that rent and/or sell in hard-copy format at a
disadvantage due to being required to collect and remit tax.
◦ Limited the base of tangible personal property in the rental, sales and use tax laws.
Senate Bill 242 of 2016 Regular Session
Senate Bill 242 intent was to provide clarification on taxability.
◦ Included the definition of tangible personal property in the sales and use tax levies.
◦ Personal property which may be seen, weighed, measured, felt, or touched, or is in any other manner
perceptible to the sense. The term shall not include stocks, bonds, notes, insurance or other contracts, or
securities, but shall include digital goods.
◦ Included a digital goods definition, which included the taxability of a digital service.
◦ Sounds, images, data, facts, or information, or any combination thereof, transferred electronically,
including, but not limited to, specified digital products and any other service transferred electronically
that uses one or more software applications.
Issues with Senate Bill 242 of 2016 Regular Session
◦ Potentially created a greater inequality for those industries that have to remit franchise tax
based on gross receipts.
◦ Did not clearly differentiate between services and tangible personal property.
◦ Definition of digital goods included “specified digital products and any other service transferred
electronically that uses one or more software applications.”
◦ Others…
Senator Marsh Digital Goods Study Committee
◦ Two meetings this fall including legislative staff, DOR staff, and
industry reps
◦ Limited participation from industry
◦ Streamlined definitions as starting points
Senator Marsh Digital Goods Study Committee
◦ Unresolved Issues:
◦ Rental v. Sales v. Entirely new tax
◦ Cable v. Satellite v. Over the top providers
◦ Municipal franchise fees – double tax??
◦ Less than permanent use?
◦ Streaming / subscription?
◦ Beyond books, tv and movies
◦ Basic cable and satellite
Thank you
Alabama Department of Revenue