In a recent letter ruling, the Missouri Department of Revenue was asked to consider if certain video and virtual-reality game products were subject to that state’s sales and use tax. Specifically, the products at issue in the ruling request were:
- digital access codes printed on a receipt, which when entered on a website allow a purchaser access to remotely hosted software and other digital goods;
- digital access codes printed on a receipt, which when entered on a website, a purchaser to download computer software hosted on a 3rd party server containing new gaming levels and characters to enhance game play;
- subscription cards with codes allowing the purchaser to download content to their gaming devices; and
- points and nominal value cards, allowing the purchaser both points and values to be used by gamers in play.
The Department noted that sales of or access to remote-access software through digital codes is not an enumerated good or service subject to either sales or use tax. Further, the Department determined that under the state’s true object test, the customer’s purpose in purchasing the codes was not to acquire tangible property but rather, access to computer games and game ‘add-ons” (new levels; characters) over the Internet.
Notably, and with respect to the aforementioned products, the Department determined that only when the purchase of an original computer program was subject to tax—meaning sold in some tangible form, such as a CD—would digital access codes tied to that product be subject to tax. Thus, if a customer purchases a video game on a CD, and then purchases a card with a digital code that allows the player to “unlock” new levels to a game or access to a set of traits or character attributes, those codes would be subject to sales tax.
The ruling is noteworthy: It provides guidance to sellers of video, virtual-reality and social-media content and may provide a refund opportunity for sellers that have remitted the tax. But time may be short. The concept of tying the taxability of access codes to the purchase of some underlying purchase of an underlying program on a tangible media may be based on a business model that is soon to disappear. Winrumors has been reporting the development of Xbox channels, and Tom’s Guide has been keen to note that Apple’s new TV project could do to the gaming console what iTunes did to the CD. So, Missouri’s ruling could soon be: GAME OVER.
A hat tip to my colleague Don Griswold, partner in Reed Smith’s D.C. office working on these issues, for getting us thinking about this ruling and its implications and opportunities. Thanks, Don!