Are membership fees for streaming live and on-demand fitness classes subject to Tennessee sales tax?
Plain-English summary
A company sells internet-connected home exercise equipment and, separately, online memberships that stream both live, instructor-led fitness classes and a library of pre-recorded, on-demand classes. The live and on-demand classes come bundled together for a single, non-itemized monthly or yearly fee. During classes, users see performance feedback and a leaderboard with biometric data like heart rate, calories, and distance.
The Tennessee Department of Revenue ruled the membership fees are taxable. The reason: the pre-recorded, on-demand classes are "specified digital products" — specifically digital audio-visual works (moving pictures with sound), the digital equivalent of a work-out video or DVD, which Tennessee taxes. Once a taxable product is bundled into a single non-itemized price with other things, the entire price is taxed.
Two arguments from the taxpayer failed. First, the interactive, participatory nature of the classes doesn't pull the recordings out of the "specified digital products" category — a pre-recorded class is still a taxable digital audio-visual work no matter how much the user interacts with it. Second, the biometric tracking and leaderboard aren't exempt "data processing and information services," because the user's primary purpose is access to the classes, not the data; the data is incidental. And even if the data features were a separate non-taxable service, bundling a non-taxable service with a taxable product doesn't make the whole membership exempt.
Notably, the Department reaffirmed that live, instructor-led online classes, sold on their own, are generally not subject to Tennessee sales tax — it was the bundled pre-recorded library that made this membership taxable.
What this means for you
Online fitness, wellness, and class-based subscriptions
If your subscription includes a library of pre-recorded video classes, Tennessee will likely treat those recordings as taxable specified digital products — and if you sell them in one non-itemized price with anything else, the whole subscription becomes taxable. Selling purely live, instructor-led sessions is generally not taxable, but mixing in on-demand recordings changes the result.
Anyone selling bundled digital products and services
Tennessee's bundling rule is unforgiving: one taxable component in a single non-itemized price taxes the entire price. Separately stating and making truly optional the non-taxable pieces (as the caterer did in Tomkats) is what can keep them out of the tax base. Lumping everything into one fee does the opposite.
Businesses relying on a "data/information services" exclusion
The exclusion for data-processing and information services applies only when the processed data or information is the purchaser's primary purpose. Biometric stats and a leaderboard riding along with a fitness-class subscription are incidental and won't carry the exclusion.
Accountants and tax professionals
The holding rests on the specified-digital-products definitions (§ 67-6-233(b)(2), § 67-6-102(94), § 67-6-102(30)), the bundling rule in the "sales price" definition (§ 67-6-102(87)(A)(vi)), and the data-services exclusion in § 67-6-233(d). Compare prior Ruling 17-18 (pre-recorded online courses) and the live-class treatment in Ruling 20-04 and Revenue Ruling 17-17.
Common questions
Q: Are online fitness-class memberships taxable in Tennessee?
A: If the membership includes pre-recorded, on-demand classes, yes — those recordings are taxable specified digital products, and bundling them into one non-itemized fee makes the whole membership taxable. A membership for only live, instructor-led classes is generally not taxable.
Q: Our classes are interactive — doesn't that make them a service rather than a digital product?
A: No. The Department held that a pre-recorded class remains a taxable digital audio-visual work regardless of how interactive or participatory it is. It's treated like a streamed work-out video.
Q: We include biometric tracking and a leaderboard. Isn't that exempt data processing?
A: Not here. The exclusion for data-processing/information services applies only when that data is the buyer's primary purpose. The primary purpose is access to the classes; the stats are incidental — and bundling a non-taxable service with a taxable product doesn't exempt the package.
Q: Can I rely on this ruling?
A: Not directly. A Tennessee letter ruling binds the Department only as to the taxpayer and exact facts it addressed and cannot be relied on by anyone else. How you itemize and bundle your offerings can change the outcome. Tennessee sales tax is state-administered, so there is no separate self-collected city tax.
Citations and references
Statutes:
- Tenn. Code Ann. § 67-6-233(b)(2) (specified digital products subject to sales tax)
- Tenn. Code Ann. § 67-6-102(94) (taxable specified digital products)
- Tenn. Code Ann. § 67-6-102(30) (definition of "digital audio-visual works")
- Tenn. Code Ann. § 67-6-102(87)(A)(vi) (definition of "sales price"; bundled transactions)
- Tenn. Code Ann. § 67-6-233(d) (exclusion for data-processing and information services)
- Tenn. Code Ann. § 67-6-212 (amusement tax) and § 67-6-330 (amusement-tax exemption)
Cases and rulings:
- Tomkats Catering, Inc. v. Johnson, No. M2000-03107-COA-R3-CV, 2001 WL 1090516 (Tenn. Ct. App. Sept. 19, 2001) (optional, separately stated services severable from a bundled sale)
- Magnavox Consumer Electronics v. King, 707 S.W.2d 504 (Tenn. 1986) (fuel bundled into a rental price is taxable)
- Penske Truck Leasing Co. v. Huddleston, 795 S.W.2d 669 (Tenn. 1990) (separate, divisible contract)
- Tenn. Dep't of Revenue Letter Ruling 17-18 (pre-recorded online courses), Letter Ruling 20-04 and Revenue Ruling 17-17 (live online classes generally not taxable), and Letter Ruling 14-10 (bundling / true object)
Source
- Landing page: https://www.tn.gov/revenue/tax-resources/legal-resources/tax-rulings.html
- Original PDF: https://www.tn.gov/content/dam/tn/revenue/documents/rulings/sales/23-01.pdf
Original ruling text
Letter rulings are binding on the Department only with respect to the individual taxpayer being
addressed in the ruling. This ruling is based on the particular facts and circumstances
presented and is an interpretation of the law at a specific point in time. The law may have
changed since this ruling was issued, possibly rendering it obsolete. The presentation of this
ruling in a redacted form is provided solely for informational purposes and is not intended as
a statement of Departmental policy. Taxpayers should consult with a tax professional before
relying on any aspect of this ruling.
The application of the Tennessee sales and use tax to live and on-demand fitness classes accessed
online.
This letter ruling is an interpretation and application of the tax law as it relates to a specific set of
existing facts furnished to the Department by the taxpayer. The rulings herein are binding upon the
Department and are applicable only to the individual taxpayer being addressed.
This letter ruling may be revoked or modified by the Commissioner at any time. Such revocation or
modification shall be effective retroactively unless the following conditions are met, in which case the
revocation shall be prospective only:
(A)
The taxpayer must not have misstated or omitted material facts involved in the
transaction;
(B)
Facts that develop later must not be materially different from the facts upon
which the ruling was based;
(C)
The applicable law must not have been changed or amended;
(D)
The ruling must have been issued originally with respect to a prospective or
proposed transaction; and
(E)
The taxpayer directly involved must have acted in good faith in relying upon the
ruling; and a retroactive revocation of the ruling must inure to the taxpayer’s
detriment.
[REDACTED] (the “Taxpayer”) sells home exercise equipment that can connect to the internet. The
Taxpayer also offers access to both live, instructor-led fitness classes and pre-recorded, on-demand
fitness classes that can be streamed through a video screen attached to the exercise equipment or
the display of any internet connected device. Customers within and outside Tennessee (the “Users”)
gain access to the classes by purchasing online memberships sold by the Taxpayer. Users may
purchase the home exercise equipment without purchasing a membership, and they may purchase a
membership without purchasing the home exercise equipment.
The live and on-demand classes are sold together for a non-itemized membership fee that can be
billed monthly or yearly. During classes, Users are provided with feedback from their internet
connected devices or exercise equipment about their individual performance and can compare their
individual performance to other Users participating in the same class. During a live class, the
performance information for all Users in the class is posted on a leaderboard screen and includes
biometric information analysis through the use of data points such as heartrate, calorie burn, and
distance traveled. On-demand classes allow Users to compare their performance against the other
participants who took the live version of the class. The Taxpayer offers many live, instructor-led classes
at all hours that subscribers can attend, and those classes are recorded for later use. Thousands of
pre-recorded, on-demand classes can be accessed by Users anytime.
1.
Are the Taxpayer’s membership fees for access to its online fitness classes subject to
Tennessee sales and use tax?
Ruling: Yes. The membership fees are subject to Tennessee sales and use tax as a transaction
that includes taxable specified digital products.
2.
Does the interactive nature of the Taxpayer’s offerings remove its classes from being classified
as “specified digital products?”
Ruling: No. The pre-recorded on-demand classes are specified digital products subject to
Tennessee sales and use tax.
3.
Are the membership fees exempt if they include data processing and information services?
Ruling: No. The performance information provided by the Taxpayer for both types of classes
is incidental to the sale of the classes. Furthermore, even if deemed a separate product that
is included in the sale, the inclusion of nontaxable services in a bundled transaction that
includes taxable products does not cause the entire transaction to be exempt from tax.
- The membership fees are subject to Tennessee sales and use tax.
The Taxpayer’s membership fees are subject to Tennessee sales and use tax because the prerecorded classes included with the membership are taxable specified digital products. When the prerecorded classes are included in a transaction involving other products, the entire transaction is
subject to sales and use tax.
2
Pre-recorded on-demand classes are subject to sales and use tax because they qualify as specified
digital products.1 Taxable specified digital products include electronically transferred digital audiovisual works.2 Digital audio-visual works are works of moving pictures combined with sound. 3 In this
instance, fitness classes that are recorded to provide Users with on-demand access are moving
pictures combined with sound, making them taxable digital audio-visual works.4 These pre-recorded
classes are very similar to work-out videos or DVDs that can be viewed at one’s convenience; however,
the tangible tape or disc has been replaced with online access. Essentially, this means that the
transaction is taxable whether the product is delivered in tangible or digital form. Consequently,
membership fees that include access to the thousands of pre-recorded on-demand fitness classes are
subject to sales and use tax.
In Tennessee, whenever two or more separate products are sold for one non-itemized price and at
least one of the products is subject to sales tax, the entire sales price is subject to sales tax. 5 This
treatment as applied to tangible and digital personal property is set forth in the definition of “sales
price,” which states that the sales price includes “[t]he value of exempt personal property given to the
purchaser where taxable and exempt personal property have been bundled together and sold by the
seller as a single product or piece of merchandise.”6
This approach is generally applied when non-taxable services are combined with taxable products.7
For example, in the unreported case of Tomkats Catering, Inc. v. Johnson,8 a catering company included
one server per banquet table in the cost of its banquet food, while also providing the option of hiring
additional servers for a separate cost that was itemized on the invoice. The taxpayer argued that the
optional services were non-taxable service contracts severable from the catering contracts because
the charges for the optional services were separately invoiced.9 The court ruled that the costs of the
optional services were separable and divisible from the food and, therefore, not taxable.10 Had the
services not been optional and separately stated, they would have been taxed as part of a bundled
sale of food and services.
1
TENN. CODE ANN. § 67-6-233(b)(2).
2
TENN. CODE ANN. § 67-6-102(94) (2022).
“Digital audio-visual works” means a series of related images that, when shown in succession, impart an impression of motion,
together with accompanying sounds, if any, that are transferred electronically. TENN. CODE ANN. § 67-6-102(30).
3
See Tenn. Dept. Rev. Ltr. Rul. 17-18 (ruling that pre-recorded online training courses accessed via a monthly subscription are
specified digital products subject to Tennessee sales and use tax).
4
See TENN. CODE ANN. § 67-6-102(87)(A)(vi) (defining sales price); see also Magnavox Consumer Electronics v. King, 707 S.W. 2d 504
(Tenn. 1986) (holding that where fuel costs are included in the agreed rental price of equipment, the entire lease payment is
subject to the use tax); Cf Penske Truck Leasing Co., L.P. v. Huddleston, 795 S.W. 2d 669 (Tenn. 1990) (concluding that, in a suit
involving a lease of vehicles, the lease of equipment agreement and the fuel sales agreement are separate parts of a divisible
contract, therefore the fuel receipts must be considered separately from the fixed rental rate and the fixed mileage rate).
5
6
TENN. CODE ANN. § 67-6-102(87)(A)(vi).
7
See generally Tenn. Dept. Rev. Ltr. Rul. 14-10 (Oct. 13, 2014).
8
No. M2000-03107-COA-R3-CV, 2001 WL 1090516 (Tenn. Ct. App. Sep. 19, 2001).
9
Id. at *1.
10
Id. at *2.
3
The Taxpayer’s on-demand classes are subject to sales and use tax as specified digital products.
Because they are included with the membership and the membership is sold for one non-itemized
price, the entire transaction is subject to sales and use tax.
It is useful to note that live, online, instructor led classes are generally not subject to sales and use tax
in Tennessee.11 The Taxpayer has suggested that the membership fees are subject to the amusement
tax pursuant to TENN. CODE ANN. § 67-6-212 and has inquired as to whether an exemption to the
amusement tax found in TENN. CODE ANN. § 67-6-330 applies to the online memberships it sells. The
exemption applies to sales and use taxes imposed on various amusements and activities listed in
TENN. CODE ANN. § 67-6-212. Regardless of whether the live, online instructor led classes are not subject
to sales and use tax, or if they are exempt from sales and use tax, the Taxpayer’s membership fees
are still subject to sales and use tax because they include the sale of specified digital products.
2. The interactive nature of the Taxpayer’s offerings does not remove its pre-recorded classes from
being classified as “specified digital products”.
The Taxpayer has also inquired as to whether the interactive and participatory nature of the online
classes removes the Taxpayer’s classes from being considered specified digital products. As explained
above, the membership fee is subject to sales and use tax because the membership includes access
to taxable pre-recorded, on-demand classes. As discussed, the pre-recorded online classes are more
akin to buying pre-recorded work-out videos, which similarly are subject to sales and use tax
regardless of the buyer’s level of interaction with the video.
3. The primary purpose of the transaction at issue is not data processing and information services.
Lastly, the Taxpayer has inquired as to whether the membership fees may be exempt because they
include the biometric tracking of the User and the display of leaderboard information, which the
Taxpayer suggests is tax exempt data processing and information services. TENN. CODE ANN. § 67-6233(d) (2022) provides that “subscriptions to data processing and information services that allow data
to be generated, acquired, stored, processed or retrieved and delivered by electronic transmission to
a purchaser, where the purchaser’s primary purpose for the underlying transaction is the processed data
or information, are excluded from specified digital products …” (Emphasis added).
Even if the Taxpayer’s biometric tracking and leaderboard functions could be considered data
processing and information services, those functions are not the purchaser’s primary purpose for the
underlying transaction. The purchaser’s primary purpose for the underlying transaction is to gain
access to live and pre-recorded fitness classes. Without the classes, the memberships have no value.
While the biometric data and leaderboard may provide value to the Users, that value is only incidental
to the Users’ access to the classes. Furthermore, even if the Taxpayer’s biometric tracking and
leaderboard functions were deemed a separate product that is included in the sale, the inclusion of
non-taxable services in a bundled transaction that includes taxable products does not cause the entire
transaction to be exempt from tax.12 The inclusion of biometric tracking and leaderboard information
does not alter the taxability of the transaction, which includes taxable specified digital products.
11
See, e.g., Tenn. Dept. Rev. Ltr. Rul. 20-04 (June 10, 2020) and Tenn. Dept. Rev. Rev. Rul. 17-17 (Oct. 31, 2017).
12
Supra note 5.
4
Approved:
David Gerregano
Commissioner of Revenue
Date:
3/9/2023
5