Were sales of digitally delivered articles and website membership fees taxable when buyers mainly acquired the right to republish the articles?

Plain-English summary

A Kansas corporation planned a members-only website where writers would post articles for sale. Buyers would pay through the platform for the right to republish articles in newspapers and other media; the site would keep a percentage and remit the balance to writers. It might also charge a membership fee for access.

The Department said none of those receipts were subject to Kansas sales tax under the law described in 2010.

First, Kansas did not tax digitized products transferred electronically, except canned software. Second, the transaction's true object was the intangible right to republish a writer's work, not ownership of a tangible article copy. The Department said that analysis would remain the same even if the article were delivered on paper or CD, because acquiring publishing rights differs fundamentally from buying a book or pamphlet.

Website membership fees were also nontaxable. The Department compared them to access charges for information services such as CCH and Westlaw, while warning that future legislation could change the result.

Because the website's services were nontaxable, the owner was the consumer of what it used to operate. It had to pay tax on computers, servers, printers and peripherals, canned software, paper, office equipment and supplies, electricity, gas, and other purchases taxable to an ordinary consumer.

What this means for you

Digital publishers and marketplaces

Separate the intangible rights being sold from any tangible or software product. The core transaction here was a license to republish electronically delivered content, not a sale of canned software or a physical publication.

Membership websites

The 2010 letter treated access fees as nontaxable, but it expressly anticipated that legislation on electronic information services could change the outcome. Current law and the site's actual features need fresh review.

Content buyers

Receiving a paper or CD copy would not by itself have made this transaction taxable because the true object remained the right to republish. A purchase aimed at acquiring the publication itself could be different.

Common questions

Q: Were electronically delivered articles taxable?
A: No. The letter said Kansas did not tax digitized products transferred electronically except canned software.

Q: What if the article was delivered on paper or CD?
A: The Department still treated the transaction as nontaxable because the buyer's true object was the intangible republication right.

Q: Were website membership fees taxable?
A: Not under the 2010 law described, though the Department warned that future legislation could change that result.

Q: Did the website owner buy its operating equipment tax-free?
A: No. The owner paid tax as the consumer of computers, servers, canned software, utilities, office supplies, and other taxable inputs.

Citations and references

• Kansas Department of Revenue's 2010 treatment of digitized products, canned software, intangible republication rights, and electronic information-site access, as stated in the letter

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: O-2010-003

Original ruling text

Opinion Letter

Body:

Office of Policy & Research

April 29, 2010

XXXX
XXXX
XXXX

RE: Your letter dated April 21, 2010

Dear XXXX:

Thank you for your recent letter. A Kansas corporation plans to establish an internet website that can be accessed by site members. Writers will post article on the site for sale to buyers at a specified price. The buyer obtains the right republish the article in their newspapers and other media. Payment for the articles will be made to the website owner.

The site owner will compile sales information each month, retain a percentage of the receipts as a royalty, and pay over the balance to writers based on receipts from the articles sold. The site owner may charge a membership fee to access to the website.

You ask if any of the charges or receipts are subject to Kansas retailers' sales tax. The answer is no.

Kansas sales tax does not apply to sales of digitized products transferred electronically, except for sales of canned software. Since the articles are being delivered in digitized form via the Internet, the sales are not subject to sales tax. In addition, even if the articles were transferred as paper copies or on CD's, the real object of the buyer is to acquired the right to republish the article, rather than to obtain the article in a tangible form. This is an intangible right and sales of such rights are not subject to Kansas sales tax. Paying for the intangible right to republish a writer's work product is fundamentally different than buying the writer's work product in the form of a book or pamphlet.

This sales tax treatment is the same one that is accorded to lawyers who draft legal instruments, and accountants who complete tax returns and provide tax planning for clients. In these cases, the true object of the transaction is the professional service even though the work product may be delivered to the client on paper or on a CD.

If the website begins charging membership fees to access the website, the fees will not be subject to Kansas sales tax. Kansas currently does not tax access to information service sites such as CCH and Westlaw. This may change in the future. If it does, you will be required to resubmit your request so that the department can determine whether or not the new law applies to the service you describe. An statutory definition of "electronic information service" or something similar may not be broad enough to include a business like the website you describe. While the 2010 legislature is reviewing new revenue sources, I don't believe the legislature has asked Legislative Research for statutory language that would broaden the sales tax base by taxing electronic information services.

Because the services in question are not subject to sales tax, the website owner is required to pay sales tax when it buys goods and taxable services. Taxable purchases include purchases of computers, servers, peripheral equipment such as printers, canned software , paper and other office supplies, office equipment, electricity, gas, and any other purchases that are taxed when made by an average consumer. Please call me at 785-296-3081 if you have any additional questions.

Sincerely,

Thomas E. Hatten
Attorney/Policy & Research

Date Composed: 04/29/2010 Date Modified: 04/29/2010

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