United States

Indiana: Membership Fee Paid to Online Retailers Not Subject to Indiana Sales Tax

Dec 07, 2015
From KPMG TaxWatch

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The Indiana Department of Revenue recently addressed whether an annual membership fee paid by certain of an online retailer’s customers was subject to Indiana sales and use tax. The taxpayer operated a website that allowed it and certain unrelated sellers to make sales of goods or services. For an annual fee, customers could purchase a membership entitling them to shipping benefits, special pricing on certain goods, early access to certain deals, access to electronic books including for permanent download, music, free streaming of certain movies and television shows, and cloud storage. The shipping benefits included free two-day shipping and other discounted shipping on eligible purchases, including a “bulky item” benefit that allowed members to purchase and ship items weighing up to 45 pounds for a flat shipping fee. Customers could also receive these benefits as part of a one-month free trial.

Under Indiana law, sales tax is imposed on retail transactions made in Indiana. A retail transaction is generally defined as a transfer of tangible personal property for consideration. In addition, Indiana sales and use tax applies to certain products and services transferred electronically, including specified digital products (e.g., music, movies, and books) where the user is granted a right of permanent use. Thus, the key issue was whether the purchase of a product membership involved the transfer of tangible personal property, prewritten computer software, specified digital products or taxable services, such as telecommunications services. The Department noted that certain membership features—permanently downloaded e-books and delivery charges that are not separately stated- would be subject to sales tax if purchased and it could be argued that members were paying for these items with their membership fees. However, the Department noted that not every member would utilize each feature in the course of its membership. Thus, in the Department’s view, a membership fee was akin to an optional warranty contract, which is not subject to sales and use tax because there is no certainty that a taxable item will be transferred. The Department concluded that the annual membership fee and the free trial were not subject to sales or use tax. For more information on Indiana Revenue Ruling 2014-01ST (Oct. 30, 2015), please contact Dave Perry at (513) 763-2402.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.