Is a subscription fee for streaming or accessing digital content over the Internet subject to Connecticut sales and use tax?

Plain-English summary

A company charges customers a recurring fee — monthly or annual — for the ability to stream digital content over the Internet. It marketed the offering as a subscription that only provides access to digital content. It asked the Department of Revenue Services whether that fee is subject to Connecticut sales and use tax when the customer is in Connecticut.

DRS ruled yes. In Connecticut, sales of services are exempt from sales tax unless the law specifically lists the service as taxable. Computer and data processing services are on that list, and DRS's regulation defines them to include "retrieving or providing access to information." Because the subscription's whole purpose is to give the customer access to digital content, DRS treated it as a computer and data processing service — and therefore taxable — when sold to a Connecticut customer.

The key move is the characterization: the subscription wasn't analyzed as a sale of a movie, song, or other "digital good," but as a service that provides access to information, which squarely fits the computer-and-data-processing category.

What this means for you

Streaming and digital-content businesses

If your subscription's value to the customer is access to content or information delivered online, Connecticut is likely to treat it as a taxable computer and data processing service — regardless of how you label it. Calling it "just a content subscription" does not take it out of the tax; DRS looks at what the customer actually gets. If you have Connecticut subscribers, plan to register for and collect the tax.

SaaS and other online-access providers

The reasoning reaches well beyond entertainment streaming. Any recurring online service whose function is retrieving or providing access to information can fall in the same category. Map each of your offerings to what it delivers before assuming a subscription is untaxed.

Accountants and tax professionals

The holding rests on Conn. Gen. Stat. § 12-407(a)(37)(A) (computer and data processing services enumerated as taxable) read together with Conn. Agencies Regs. § 12-426-27(b)(1), which defines those services to include "retrieving or providing access to information." This is a characterization ruling, not a rate ruling — DRS did not address the applicable rate here, and Connecticut's separate reduced-rate treatment of computer and data processing services should be confirmed against current law for any specific engagement.

Common questions

Q: Is a digital streaming subscription taxable in Connecticut?
A: Yes, where the subscription provides access to digital content. DRS treats providing access to digital content as a computer and data processing service, which is a specifically enumerated taxable service.

Q: We only give access to content — we don't "sell" anything. Does that matter?
A: No. DRS focused on the fact that the customer receives access to digital content, which fits the regulatory definition of computer and data processing services ("retrieving or providing access to information"). The access itself is the taxable service.

Q: Does it matter where our company is located?
A: The ruling ties taxability to the customer's location — the fee is taxable "when the service is sold to a customer located in Connecticut."

Q: Does this ruling apply to my subscription product?
A: Not automatically. A Connecticut Ruling binds DRS only for the taxpayer and facts it addressed. A product that delivers something other than access to digital content, or bundles taxable and non-taxable elements, could be analyzed differently.

Citations and references

Statutes:

• Conn. Gen. Stat. § 12-408 (imposition of sales tax on retail sales)
• Conn. Gen. Stat. § 12-407 (services taxed only if specifically enumerated)
• Conn. Gen. Stat. § 12-407(a)(37)(A) (computer and data processing services)

Regulations:

• Conn. Agencies Regs. § 12-426-27(b)(1) (computer and data processing services include "retrieving or providing access to information")

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 2015-5

Original ruling text

Ruling 2015-5, Sales and Use Taxes, Computer and Data Processing Services

FACTS:

Company charges a recurring fee (monthly or annual) for the ability to stream digital content over the Internet. Company presents this service as a subscription that only provides access to digital content.

ISSUE:

Is the fee subject to Connecticut sales and use tax when the service is sold to a customer located in Connecticut?

RULING:

The fee is subject to Connecticut sales and use tax because the subscription provides the customer with the right to access digital content, and sales of access to digital content are taxable as computer and data processing services.

DISCUSSION:

Connecticut generally imposes sales tax on retail sales of tangible personal property.  Conn. Gen. Stat. § 12-408.  In contrast, sales of services are exempt from sales tax unless specifically enumerated as taxable in Conn. Gen. Stat. § 12-407.  Computer and data processing services are specifically enumerated as being subject to sales and use tax.  Conn. Gen. Stat. § 12-407(a)(37)(A).  Computer and data processing services include “retrieving or providing access to information.”  Conn. Agencies Regs. § 12-426-27(b)(1).  Therefore, services providing access to digital content are taxable as computer and data processing services.

Company sells its customers a service that only provides access to digital content.  As the sales of services providing access to digital content are taxable as computer and data processing services, the subscription fee is subject to Connecticut sales and use tax when the service is sold to a customer located in Connecticut.

OFFICE OF COUNSEL

November 3, 2015