IDOR rules that internet video streaming is subject to sales/use tax. Is it really?

Dickinson Law Firm, Des Moines Iowa, Cody Edwards, Iowa Tax Law, Iowa Table SALT Law, Iowa Construction Law

Posted on 02/13/2017 at 12:00 AM by Cody Edwards

Recently, the Iowa Department of Revenue (“Department”) ruled in a Declaratory Order (“DO”), In the Matter of Amazon Services LLC, Docket No. 2017-240-2-000 (Jan. 2017), that Prime Membership (“Prime”) and Prime Video are subject to sales and use tax. For those unfamiliar with Prime, a lump-sum, non-itemized payment of $99 per year will give you access to many benefits such as Prime Video, Amazon Dash Button, Prime Elements, Prime Photos, and Prime Pantry. Prime Video allows users to stream movies and TV shows via the internet. The DO provides a two-and-a-half page description of Prime’s benefits. 

The Department determined that the entire cost of Prime is, indeed, subject to tax by relying on Iowa’s bundled transaction statute. A bundled transaction is “the retail sale of two or more distinct and identifiable products . . . which are sold for one non-itemized price.” Iowa Code § 423.2(8)(a). Thus, if one of the goods or services that is included within the $99 paid for Prime is taxable, the entire $99 purchase price is subject to tax. 

For its bundled transaction analysis, the Department looked at the taxability of Prime Video. The Department made the determination that Prime Video is the taxable service of “pay television” and, as a result, that Prime is a taxable bundled transaction.

A close reading of the DO and related laws left me scratching my head.

In submitting its Petition for Declaratory Order, Amazon was correct to ask whether Iowa Code § 423.3(67) applies to Prime Video. Iowa Code § 423.3(67) exempts from sales tax tangible personal property “if the substance of the transaction is delivered to the purchaser digitally, electronically, or utilizing cable, or by radio waves, microwaves, satellites, or fiber optics.”  In its response that 423.3(67) does not apply to Prime Video, the Department, using the following emphasis, cited IAC r. 701—231.14:

Sales of items such as artwork, drawings, photographs, music, electronic greeting cards, “canned” software (reference 701—subrule 18.34(1)), entertainment properties (e.g., films, concerts, books, and television and radio programs), and all other digitized products delivered as described above are not taxable, except the exclusion does not repeal by implication the tax on the service of providing pay television. Reference rule 701—26.56(422,423).

The Department used the emphasis to indicate its belief that Prime Video is pay television. However, the Department’s analysis failed to explain why the portion of 701—231.14 that provides an explicit exemption for “entertainment properties (e.g., films, concerts, books, television and radio programs)” that are electronically delivered does not apply. Basic rules of statutory construction tell us that entertainment properties—films and TV programs—that are electronically delivered must be different than the services of pay television. We are left guessing why Prime Video is not an exempt entertainment property.  

As further support that Prime Video is taxable as pay television, the Department stated that “Prime Video service fits within the common-sense understanding of the statutory term ‘pay television’” and that “a statute can encompass technologies not in existence at the time of promulgation.” However, relying on a common-sense understanding and expanding the statute to encompass technologies not in existence at the time of promulgation should be done only when the statute does not limit a statute’s application. See Sherwin Williams v. Iowa Dep’t of Revenue 789 N.W.2d 417, 425 (Iowa 2010). (“The legislature may act as its own lexicographer. When it does so, we are normally bound the legislature’s definitions.”). Arguably, the Department’s administrative rule that relates to pay television, IAC r. 701—26.56, contemplates taxation of cable and satellite television. Accordingly, it would seem improper to expand the definition of pay television to include internet video streaming.

Finally, since services are not taxed unless specifically enumerated, the statutes imposing tax on services are “imposition statutes.” Imposition statutes are strictly construed against taxation with all doubts resolved in favor of the taxpayer. Pay television is considered a service so any doubts about whether internet video streaming is taxable as pay television services should be resolved in favor of the taxpayer—that is, non-taxable. As explained above, there are doubts about whether internet video streaming is pay television services so the DO could have very well ruled that video streaming services are not subject to tax.  

As a result of this ruling, hundreds of thousands of Iowans who have purchased internet video streaming, such as Prime Video, Netflix, Hulu Plus, and Sling, may owe sales or use tax on their past and future purchases of these items—even if they are not being charged tax. For the above reasons, I will be scratching my head when I pay tax on my purchases of Amazon Prime and Netflix.

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.

- Cody Edwards


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