Is digital music temporarily downloaded to a coin-operated jukebox subject to Texas sales tax, and who — the music service, the jukebox operator, or the bar/restaurant hosting the jukebox — owes it?

Plain-English summary

A licensed coin-operated-amusement operator places jukeboxes in bars and restaurants ("Establishments") and gets music from a music-service company under a Music Service Agreement. Depending on the location's expected traffic, the operator picks one of two pricing plans: a 20% Program (a straight revenue-share — the music company gets 20% of gross jukebox revenue) or a Fixed Rate Program (the operator pays set per-download and per-play fees). Separately, the operator has its own revenue-sharing arrangement with each Establishment for hosting the jukebox. The operator asked whether digital music downloads are taxable, and if so, who owes the tax.

The Comptroller ruled digital music is tangible personal property and its sale is taxable, even though each download only exists on the jukebox for the length of the song — temporariness doesn't matter (citing its own 2006 guidance on the same point). The identity of who owes the tax, though, tracks who actually purchases the music from the service company: under the 20% revenue-sharing program, the music-service company itself buys the digital music to fulfill its own revenue-share deal with the operator, so the music company owes the tax, not the operator. Under the Fixed Rate program, the operator is the one directly buying individual downloads at a set price, so the operator owes the tax there. Either way, the operator's separate revenue-sharing agreement with the Establishments where the jukeboxes sit is not a sale of anything — the operator isn't reselling music to the Establishments, just splitting jukebox proceeds — so no additional sales tax applies to that split, and the operator should not collect tax from Establishments on it.

What this means for you

Coin-operated amusement operators (jukeboxes, similar digital-content devices)

The taxability of digital content doesn't depend on how long it persists on the device — a download that's deleted after one play is still a taxable sale. What matters for figuring out who owes the tax is the actual purchase structure with your content supplier: a flat percentage-of-revenue deal typically means the supplier is the "purchaser" of the content (since it's buying to fulfill its own revenue-share), while a per-item or per-download fee structure typically makes you the purchaser.

Businesses using mixed pricing structures with the same supplier

This ruling shows the tax analysis can differ location-by-location or program-by-program even within the same overall business, since the operator here used both programs simultaneously depending on the venue. Track which pricing program applies to each purchase to correctly determine who's liable.

Accountants and tax professionals

The core holding that transient digital transfers are still taxable "sales" rests on § 151.010's inclusion of digital-form items and STAR Accession No. 200604534L (2006). The who-owes-it analysis is really a resale/purchaser-identification exercise: look at who is contractually buying the digital music from the upstream supplier to fulfill which downstream obligation.

Common questions

Q: Is digital music that's only downloaded temporarily (deleted after each play) exempt from sales tax?
A: No. The sale of digital music is taxable regardless of how long it exists on the receiving device.

Q: How do I know whether my company or my supplier owes the tax on digital downloads?
A: It depends on the purchase structure. If your supplier buys the content itself to fulfill a revenue-sharing deal with you, the supplier owes the tax. If you're the one paying a set per-download or per-play fee to acquire the content, you owe the tax.

Q: Does the operator need to collect sales tax from the bars/restaurants hosting its jukeboxes?
A: No. The operator's revenue-sharing agreement with those Establishments isn't a sale of music to them — it's just splitting jukebox proceeds for the right to place the machine — so there's no sales tax on that arrangement.

Q: Can another jukebox or amusement operator rely on this ruling?
A: No. It binds the Comptroller only for the taxpayer and facts presented; a different contractual structure with a content supplier could change who owes the tax.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.009 (tangible personal property, including digital form); § 151.010 (taxable item); § 151.005(a) (sale/purchase — transfer of title or possession); § 151.051 (sales tax imposed)
• Tex. Occ. Code § 2153.152 (General Business License for coin-operated amusement machines)

Cited prior guidance:

• STAR Accession No. 200604534L (Apr. 6, 2006) — temporary transfer of digital music is still a taxable sale

Source

• Landing page (STAR search): https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201907012L

Original ruling text

July 17, 2019

RE: Private Letter Ruling No. 20180831133648

**, Taxpayer No. **

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters.[1] We are responding to your request dated June 14, 2018. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance with respect to the taxability of music downloaded temporarily to a jukebox operated under ** (Taxpayer’s) General Business License.

Facts Presented

This response is based on Taxpayer’s aforementioned submission, as well as follow-up email submissions of Sept. 6, 2018 and April 2, 2019. Submissions included a copy of Comptroller’s STAR Accession No. 200604534L; a series of Taxpayer’s invoices from COMPANY A; and copies of: Taxpayer’s COMPANY A Music Service Agreement (MSA), Taxpayer’s COMPANY A Fee Schedule, Taxpayer’s Wireless Broadband Service Addendum to the COMPANY A Music & Service Agreement or Games and Service Agreement, the ** Location Agreement (***LA), and copies of its formation documents. Taxpayer also clarified its information in a telephone conversation of April 2, 2019.

Taxpayer is an operator in the coin-operated amusement business. Taxpayer states it has purchased jukeboxes to place in various locations (Establishments). Taxpayer holds a General Business License (under Occupations Code, Section 2153.152), and has placed permit stickers on each of its jukeboxes. Taxpayer has also entered into an MSA with COMPANY A to make music available to the jukeboxes. Taxpayer downloads music from COMPANY A to provide music in the Establishments. According to the MSA, Taxpayer may download an unlimited number of music titles without charge to jukeboxes connected to COMPANY A by means of broadband internet or COMPANY A’s local internet service provider. For jukeboxes connected by “other means,” Taxpayer may download the first 750 music titles without charge. Thereafter, Taxpayer will then pay a “Per Title Download Fee.” See MSA Section 2.2.

Under the MSA, Taxpayer may choose between two Music Service Fee Programs in order to provide jukebox service to the various Establishments. These programs are a 1) Fixed Rate Program or 2) 20% Program. Taxpayer has opted to enter into both types of programs, depending upon the anticipated level of activity at any particular Establishment.

Under the Fixed Rate Program, Taxpayer pays several fees under the Fixed Rate Program Fee Schedule. These fees include a “Base Service Fee,” “Per Play Fee,” and a “COMPANY B Per Play Fee.” See MSA Section 3.2. Under the 20% Program, Taxpayer pays COMPANY A “twenty percent (20%) of gross revenue after deductions by (Taxpayer) for payments made by (Taxpayer) for certain taxes, if applicable, as provided in Section 7, plus the ‘Background Music Fee.’” See MSA Section 3.3.

The MSA refers to an additional COMPANY B Agreement (A); however, that agreement applies to rental of jukeboxes and Taxpayer has stated that it has purchased its jukeboxes to provide music. Therefore, the A appears to be inapplicable.

Taxpayer also enters into LAs with Establishments for the placement of its jukeboxes. Under the LA, the Establishment will pay, from the first proceeds derived from the jukeboxes, Advance Costs (the annual state permit cost and an annual ASCAP permit/fee). Thereafter, Taxpayer will divide the gross revenues of the jukeboxes in the following manner:

The first 22% of the gross proceeds will go to Taxpayer to reimburse it for its COMPANY A obligations.

Establishments will reimburse all direct costs related to the jukeboxes (except for certain maintenance costs).

Establishments will pay for each jukebox annual state fees and ASCAP permits/fees.

Establishments will pay amounts related to wireless service, if any.

The remainder after these payments will be split between Taxpayer and Establishments.

Taxpayer notes that music is always downloaded only for the time it takes to play the title.

Questions, Rulings, and Analysis

Our restatements of your questions are shown below, followed by our responses and analyses.

Question One: Is digital music temporarily downloaded to a jukebox subject to sales tax?

Ruling One: The sale of digital music downloaded to a jukebox is taxable, regardless of the time it exists in the jukebox. See the ruling on Question 2 with respect to the party that owes the tax.

Analysis: Digital music is tangible personal property. Section 151.009 (“Tangible Personal Property”). Tangible personal property is a taxable item. Section 151.010 (Taxable Item). A sale, in pertinent part, is the transfer of title or possession of tangible personal property for consideration. Section 151.005(a) (“Sale” or “Purchase”). A tax is imposed on the sale of a taxable item. Section 151.051 (“Sales Tax Imposed”). The sale of a taxable item is taxable even if the item is in digital form. Section 151.010.

The transfer of digital music, even if its presence is temporary, is taxable. See STAR Accession No. 200604534L (April 6, 2006).

Question Two: Does Taxpayer need to pay sales tax on digital downloads?

Ruling Two: COMPANY A, not Taxpayer, owes sales tax on downloads of digital music COMPANY A purchases pursuant to the 20% Program undertaken with Taxpayer. Taxpayer owes sales tax on the downloads of digital music it purchases pursuant to the Fixed Rate Program under the MSA.

Analysis: Taxpayer enters into both types of agreements available under COMPANY A’s MSA, the 20% Program and the Fixed Rate Program.

The 20% Program is a revenue sharing agreement. Taxpayer and COMPANY A divide the revenues generated under the agreement. The purchase of digital music to fulfill the terms of a revenue sharing agreement is taxable.

COMPANY A purchased the digital music for this purpose. COMPANY A, therefore, owes sales tax on the digital music downloaded to the jukeboxes. Taxpayer does not owe tax on the digital music provided by COMPANY A to fulfill the terms of the revenue sharing agreement.

Taxpayer has entered into its own revenue sharing agreement (LA) with Establishments. It is not selling the music to the Establishments in these circumstances. It is merely fulfilling a revenue sharing agreement in order to place the jukeboxes at the Establishments’ locations, after having entered into another revenue sharing agreement with COMPANY A to fulfill its terms of the LA. There is no sales tax liability per the ***LA, for either the Taxpayer or the Establishments. COMPANY A still owes the tax on the digital music. Taxpayer should not collect sales tax from Establishments on receipts collected from jukeboxes at Establishments’ locations.

Taxpayer’s responsibilities under the MSA’s Fixed Rate Program are different. Taxpayer is billed a fixed rate for individual downloads of digital music. Taxpayer’s LAs with Establishments, as noted above, are revenue sharing agreements. Since Taxpayer is acquiring the digital downloads and using them to fulfill its LAs, Taxpayer owes tax on the digital downloads purchased from COMPANY A. It is not selling the digital downloads to Establishments; therefore, it should not collect tax from the Establishments on the revenues generated under the ***LAs.

STAR documents cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20180831133648.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

[1] Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.