Is selling an alphanumeric code that lets someone download digital music -- whether the code is emailed or printed on a plastic card -- subject to New York sales tax?

Plain-English summary

Apple Computer, Inc. sells digital music for download over the internet, which customers can pay for directly by credit card or through prepaid alphanumeric codes. Each code has a set dollar value redeemable on Apple's website, and codes can be delivered by email, printed paper certificates, or plastic cards — sometimes sold by third-party retailers or distributed as promotional giveaways (like on a soda bottle cap). Codes on physical cards aren't "live" until scanned at a retailer's register, but once redeemed by the customer, the physical card itself becomes worthless — the underlying digital transaction is what matters, not the card.

Apple asked three related questions, and got the same basic answer to all of them: (1) selling the code itself (however it's delivered) isn't a taxable transaction, because the Department treats these codes just like gift certificates — buying a certificate that can later be redeemed for goods isn't itself a taxable sale; (2) that holds true whether the code is delivered electronically or printed on tangible media like a plastic card or paper certificate, since it's the intangible right to download music that's being sold, not the card itself; and (3) the digital music delivered electronically — the actual product the customer ultimately receives — is itself intangible property and not subject to sales or use tax, following the Department's established position that digitally downloaded content (as opposed to the same content on a physical CD) escapes New York sales tax entirely.

What this means for you

Digital music, media, and app businesses selling prepaid download codes

Selling a prepaid code or gift card redeemable for digital content isn't a taxable transaction, regardless of whether the code arrives by email or printed on a plastic card or paper certificate — the physical medium used to convey the code doesn't change its tax treatment.

Retailers and promotional partners distributing third-party download codes

Distributing someone else's download codes as a promotional item (on packaging, receipts, or online) doesn't create a taxable event either, following the same gift-certificate-style analysis, since the underlying transaction is the sale of intangible digital content.

Accountants and tax professionals

This ruling combines two established New York principles: prepaid codes/certificates are taxed like gift certificates (no tax at time of purchase), and electronically downloaded digital content is intangible property outside the sales tax base (unlike the same content sold on a physical disc). Watch for whether a digital-goods client's product ever gets sold instead on physical media, which would flip the analysis.

Common questions

Q: Is buying a prepaid code to download digital music taxable in New York?
A: No. The code is treated like a gift certificate, and purchasing a gift certificate isn't itself a taxable transaction, regardless of delivery method (email, paper, or plastic card).

Q: Does it matter if the code is printed on a physical plastic card rather than emailed?
A: No. The Department treats the sale as a sale of an intangible (the right to download) regardless of whether a tangible medium like a plastic card or paper certificate is used to convey the code.

Q: Is downloading the actual digital music file itself taxable?
A: No. Digital music delivered electronically for download is intangible property and isn't subject to sales or use tax, following the Department's established position on downloaded content versus the same content on physical media.

Q: Can another digital-goods company rely on this exact ruling?
A: No. This Advisory Opinion binds the Department only as to Apple Computer, Inc. and the facts it described. A business selling similar codes for physical (not downloaded) media would reach a different result.

Citations and references

Statutes:

• Tax Law § 1105(a) (imposition of sales tax on retail sales of tangible personal property)
• Tax Law § 1110(a) (imposition of compensating use tax)

Prior opinions cited:

• First Colony Company, Adv Op Comm T&F, March 1, 1999, TSB-A-99(13)S
• Universal Music Group, Adv Op Comm T&F, April 18, 2001, TSB-A-01(15)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2007.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a07_14s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-07(14)S
Sales Tax
May 17, 2007

Office of Tax Policy Analysis
Technical Services Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S060411B

On April 11, 2006, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Apple Computer, Inc., c/o Terry Ryan, Director of Tax, 1 Infinite Loop,
Cupertino, California 95014. Petitioner, Apple Computer, Inc., furnished additional information
with respect to the Petition on May 15, 2006.
The issues raised by Petitioner are:

1. Whether the sale of alphanumeric codes conveying the right to download specific audio
   files is subject to sales tax when the codes are delivered electronically.
2. Whether the sale of codes conveying the right to download specific audio files is subject
   to sales tax when the codes are delivered on tangible media.
3. Whether the sale of digital music delivered electronically via the Internet is subject to
   sales tax when a code which must be entered into a computer to receive the music or
   other content is transferred to a customer on a plastic card.
   Petitioner submitted the following facts as the basis for this Advisory Opinion.
   Petitioner, headquartered in California, is, among other things, engaged in the business of
   digital distribution of music over the Internet to customers located throughout the United States,
   including New York.
   Customers use their personal computers to order music over the Internet to be delivered
   to the customers’ computers or other electronic devices. Customers pay for the digitized content
   in one of a number of ways, including with a credit card serviced by a third-party financial
   institution. The downloaded music files remain on the customers’ computers and may be copied
   to a limited number of CDs, personal computers, or handheld electronic devices.
   In certain circumstances, the purchase of electronically downloaded music will be
   effected through the acquisition, use, or transfer of alphanumeric codes. The alphanumeric code
   provides the holder with the right to electronically download a music file. Each code has a
   designated value allowing purchases of digital music available on Petitioner’s Web site. Codes
   can be furnished to purchasers via e-mail, paper certificates, or plastic cards. Codes may be
   distributed to consumers by a third party as part of a promotional campaign. Some examples of
   promotional distribution are when customers obtain a code on a sales register receipt from an
   unrelated third-party retailer, or on bottle caps manufactured by an unrelated soda manufacturer;
   or online promotions through which Internet Web site visitors may register and obtain a code

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TSB-A-07(14)S
Sales Tax
May 17, 2007

online or in an e-mail. Petitioner anticipates the circumstances and delivery mechanisms used to
distribute these codes may continue to grow in number and complexity in the future.
In some cases, alphanumeric codes printed on physical media like a plastic card or paper
certificate will be sold by retailers. In those situations, the codes on the physical media held for
sale by retailers are not “live” until activated. Activation occurs when the card or other physical
medium is scanned at the point-of-sale register. At that time, the point-of-sale register “pings”
(sends an electronic signal) to Apple’s server, which returns a signal indicating that particular
code is now active. The customer may redeem activated digital codes regardless of whether or
not the customer is in possession of the plastic card, paper certificate, or other medium. Once the
code is entered into the user’s computer, the plastic card itself is of no further use even if the
code has not been redeemed.
Applicable law and regulations
Section 1105 of the Tax Law provides, in part:
Imposition of sales tax. On and after June first, nineteen hundred seventy-one,
there is hereby imposed and there shall be paid a tax . . . upon:
(a) The receipts from every retail sale of tangible personal property, except as
otherwise provided in this article.
Section 1110 of the Tax Law provides, in part:
Imposition of compensating use tax. (a) Except to the extent that property or
services have already been or will be subject to the sales tax under this article, there is
hereby imposed on every person a use tax for the use within this state on and after June
first, nineteen hundred seventy-one except as otherwise exempted under this article, (A)
of any tangible personal property purchased at retail, . . .
Opinion
Petitioner distributes music digitally over the Internet. A customer downloads digital
music files which remain on the customer’s computer and may be copied to a limited number of
CDs, personal computers, or handheld electronic devices. Petitioner provides various payment
methods for customers to use to make their purchases. Customers may make advance payments
for future purchases of digital music files. These customers will obtain Petitioner’s digital music
files using an alphanumeric code. Each code has a designated value allowing purchases of
digital music available on Petitioner’s Web site.
With respect to Issues 1 and 2, Petitioner provides purchasers with an alphanumeric code
via e-mail, printed on a paper certificate, or imprinted on plastic cards. The codes may also be

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TSB-A-07(14)S
Sales Tax
May 17, 2007

distributed by a third party as a promotional item or sold in a tangible format by third-party
retailers. The code provides the means by which an individual can access and download the
digital music. Once the designated value of the code has been expended, the code is of no
further use. The individual who uses a code to download digital music is purchasing the same
digital music as individuals who directly purchase digital music for download by making
payment at the time of purchase by credit card or through third-party financial institutions.
Accordingly, for sales tax purposes, Petitioner’s sales of the code, as described in this Opinion,
are sales of an intangible regardless of whether a physical medium such as a paper certificate or
plastic card is used to transmit the code. See First Colony Company, Adv Op Comm T&F,
March 1, 1999, TSB-A-99(13)S. Such sales, therefore, are not subject to sales or compensating
use tax under section 1105(a) or 1110(a)(A) of the Tax Law.
With respect to Issue 3, the sale of digital music delivered electronically to customers for
download on their computers or other devices as described in this Opinion constitutes the sale of
intangible property and is not subject to sales or use tax. See Universal Music Group, Adv Op
Comm T&F, April 18, 2001, TSB-A-01(15)S. Therefore, Petitioner’s charges for the electronic
transfer of digital music via the Internet to customers, downloaded for use on the customers’
computers or similar devices, are not subject to tax regardless of whether customers make
payment by credit card or by using Petitioner’s alphanumeric code previously purchased and
transferred to the customer on a physical medium, by e-mail, or otherwise.

DATED: May 17, 2007

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

An Advisory Opinion is issued at the request of a person or entity. It is
limited to the facts set forth therein and is binding on the Department only
with respect to the person or entity to whom it is issued and only if the
person or entity fully and accurately describes all relevant facts. An
Advisory Opinion is based on the law, regulations, and Department
policies in effect as of the date the Opinion is issued or for the specific
time period at issue in the Opinion.