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Minnesota and the Taxation of Digital Products

  • Jan 28, 2014 | Gail Cole

 What would Captain Kirk think of the Internet?

“The Internet… the final frontier. This is the focus of state lawmakers. The current mission: to explore strange new products and services; to seek out new sources of state revenue; to boldly go where no tax laws have gone before” (Slight twist on Captain Kirk's Star Trek opening).

The Internet is not dissimilar from the universes explored by the Star Trek Enterprise and her crew. It has dramatically altered how we communicate with one another, how we do business, how we live. And it is a constant source of innovation. Just as we master one new Internet product, service or function, another comes along.

State lawmakers strive to keep pace with the Internet and all it offers, particularly with respect to taxation. To do so requires constant vigilance. Case in point: Minnesota.

At the start of this year, the Minnesota State Department of Revenue revised a fact sheet regarding sales and use tax and digital products. Certain digital products became subject to Minnesota sales and use tax, effective July 1, 2013. Other digital products remain exempt from the tax.

Digital product is defined as “any product that is transferred electronically to a customer.” Examples include downloadable music and movies, cell phone ring tones, online games, and e-books.

Transferred electronically is defined as when “the purchaser accesses or obtains the product in a way other than tangible storage media (such as a USB drive or DVD disk).” Examples include viewing a product streamed over the Internet, downloading a product from the Internet, and receiving a product from a retailer by email.

Taxable digital products

  • Digital audio works (songs, speeches, audio books, ring tones, etc);
  • Digital audio and audiovisual courses, training sessions, seminars, etc, when transferred electronically to the participant;
  • Digital audiovisual works (movies, music videos, news, live or recorded events) except digital photos;
  • Digital books except periodicals, magazines, newspapers, blogs, or other news and information products;
  • E-greeting cards;
  • Online video and computer games; and
  • Digital codes that “give the purchaser access to the digital products listed above,” except gift cards.

Bundled transactions containing both taxable and nontaxable goods and services sold together are subject to sales tax “unless the price of the taxable item or service is de minimum,” meaning it costs 10% or less of the entire transaction.

Minnesota considers prewritten computer software to be a physical good (tangible personal property) no matter how it is transferred.

Exempt and nontaxable digital products

The following products are not subject to sales tax in Minnesota:

  • Access to digital news articles;
  • Charts and graphs;
  • Digital drawings and photos; and
  • Logos and designs.

Products and services exempt from sales tax in Minnesota incude:

  • Digital school textbooks;
  • Digital instructional materials;
  • Tuition for online coursework; and
  • Digital products purchased for resale (with an exemption certificate, Form ST3).

Sales tax applies at the rate where the sale of a digital product occurs or is sourced to—typically the buyer’s address.

Multiple points of use (MPU)

Buyers of digital products may source the sale to multiple locations. In such cases, sales tax is applied for each location. In the event a product is exempt from sales tax, the “Multiple points of use” exemption must be checked on the completed exemption certificate.

How does your business handle the taxation of digital products?

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photo credit: Donky_Tramp via photopin cc

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.