Recently, the Florida Department of Revenue (“Department”) issued companion advisory opinions

14A19-005 and -006. The Department found that purchases and rentals of online movies and music are not subject to sales tax. Furthermore, purchases are also not subject to communications services tax. However, rentals are taxable as communications services.

The taxpayer’s video service allows customers to access video in streaming or downloadable format, or both. Customers either purchase or rent videos. Purchasers may keep the video permanently and watch it as many times as desired. Renters, on the other hand, may only watch once, within a certain timeframe from the time of rental.

In addition to purchasing and renting videos, the taxpayer grants access to its digital content to customers who purchase a membership. That membership program principally features free two-day shipping, but also includes free access to video and music streaming and downloading services.. However, customers who cancel their membership, or allow it lapse, lose access to their digital content.

Generally, Florida only imposes sales tax on the sale of tangible personal property. Fla. Stat. Ch. 212.05. Furnishing information by way of electronic images is not the sale of tangible personal property. Fla. Admin. Rule 12A-1.062.

Florida also imposes a communications service tax on the transmission of voice, data, audio, or video, including “video service.” “Video service” includes pay-per-view, digital video services, and music service. However, the sale of information services is specifically excluded from that tax. Information services include the “capability for […] making available information via communication services.” Fla. Stat. Ch. 202.11.

Here, the Department found that purchases made from the video service in any format are purchases of an exempt information service for the “capability for” “making available” content, whether for download or by streaming via the customer’s online library. However, rentals and membership-based access are taxable communications services because “this rental of digital video content [is] a ‘video service'” and, more simply, the “music service benefit is a music service.” Finally, the taxpayer must determine the portion of the membership charge attributable to digital content rentals prior to collecting the communications services tax.

The Department did not clearly explain why the rentals or, more curiously, the membership services were not exempt information services since they provided the exact same “capability for” “making available” content. Rather, it confined its analysis to matching product names with terms in the statute, suggesting opportunities for tax planning through creative naming.