Oct. 7, 2009 – Before Oct. 1, 2009, goods transferred electronically (such as music, movies, and books) were generally not subject to Wisconsin sales/use tax. This was a distinct tax advantage because the physical counterparts (such as CDs, DVDs, and paper copies of books) were subject to tax.

Legislation passed earlier this year, and effective Oct. 1, 2009, erases the distinction between electronically transferred goods and their physical counterparts. Many previously nontaxable transactions now will be subject to Wisconsin sales/use tax.

Taxable products

The scope of potentially taxable products (generally referred to as digital goods) is extremely broad and includes, but is not limited to, the following:

• Music, including recorded or live songs.

• Ringtones, including digitized sound files that are downloaded onto a device that may be used to alert the customer regarding a communication (but does not include ringback tones or other digital audio files that are not stored on the purchaser’s communication device).

• Other digital audio works, including recorded or live readings of books, other written materials, speeches and lectures.

• Movies and motion pictures.

• Musical videos.

• News and entertainment programs.

• Live or recorded events, including events such as professional football games and stock car races.

• Books, broadly defined to include literary works expressed in words, numbers, or other verbal or numerical symbols or indicia. Examples of “digital books” include novels and autobiographies; encyclopedias, dictionaries, and repair manuals; phone directories, business directories, zip code directories; educational textbooks; and cookbooks.

• Greeting cards.

• Finished artwork, including drawings, paintings, designs, photographs, lettering, paste-ups, mechanicals, assemblies, charts, graphs, and illustrative materials.

• Periodicals.

• Video or electronic games.

• Other news or information products, potentially taxable products include newsletters and information alerts sent by email.

The taxability of the product does not depend on whether the product is for entertainment, informational, or educational purposes.

Must the digital good be downloaded to be taxable?

No. To be taxable, the digital good must merely be transferred electronically to the purchaser. Here, “transferred electronically” means “accessed or obtained by the purchaser by means other than tangible storage media.”

It is not necessary that that purchaser record the digital good on tangible storage media or that the purchaser be allowed to make or retain a copy of the digital good. For example, a movie “streamed” by a retailer is a taxable digital good. Wisconsin sales/use tax also applies to leases, licenses, and rentals of digital goods.

Determining where and when a sale/purchase of a digital good takes place

Wisconsin sales/use tax only applies if the sale or purchase of a taxable digital good takes place in Wisconsin.

Sales (but not leases, rentals, or licenses) of digital goods are treated as taking place where the purchaser takes possession or makes first use of the digital good. This may occur at the seller’s location (e.g., the seller electronically transfers songs to a customer’s device while the customer is at the store). Or, this could be the location where the seller is instructed to deliver the product. If it is not clear where the purchaser took possession or made first use of the digital good, the sale is treated as taking place at the purchaser’s address. If the purchaser’s address is not known, the sale is treated as taking place at the location from which the digital good was first available for transmission by the seller.

For leases, rentals, and licenses, the first (or only payment) follows the above hierarchy to determine where the transaction takes place. For subsequent payments, if the digital good is moved from the location where initially delivered, the location for sales/use tax purposes is the address the lessee/licensee provides to the lessor/licensor.

If a digital good is sold by subscription, the sale occurs when the payment for the subscription is due to the seller.

Identifying where and when a taxable sale or purchase occurs is important because these determine the appropriate tax rate (from 5.0% to 5.6%) and on which return to report the tax.

Exemptions

Certain exemptions of the sales/use tax are still available. For example, newspapers are exempt from Wisconsin sales/use tax as are products used in manufacturing (e.g., finished artwork used to manufacture pamphlets), products used in farming (e.g., tractor repair manual transferred electronically from the vendor), and property purchased by tax-exempt entities.

These sales/use tax changes affecting digital goods sent into effect on Oct. 1. Although interpretation of what products are digital goods, when/where a sale or purchase takes place, and what potential exemptions may apply will develop over time, sellers and purchasers should review their potential sales and use tax exposure now and modify their tax practices accordingly.

Kristina E. Somers is a shareholder with Reinhart Boerner Van Deuren S.C. in Milwaukee. She practice in the firm’s tax, litigation, and tax-exempt organizations practices. 

• Related: Recent tax law changes: Widespread effect on sales/use, income/franchise, and property taxes