Iowa Amazon Prime Ruling Means Streaming Video Service Bundles Are Now Taxable

If your company offers streaming video services and you have customers in the state of Iowa, it's likely time to start collecting sales tax. And not just on the streaming videos, but on all the other services with which they are bundled.

That's what the Iowa Department of Revenue decided when it ruled that Amazon Prime memberships are taxable. Amazon's annual subscription service includes an array of benefits ranging from Kindle book rentals to music downloads to unlimited cloud photo storage. While many of these items are not eligible for the state's sales and use tax, Prime Video is. In Iowa, that also means Amazon Prime memberships are taxable in their entirety.

What's different about this ruling

Iowa isn't the first state to weigh in on the taxability of streaming video. In addition to sales tax in many states, these services may also be subject to utility users tax in California, communications tax in Florida, and utility receipts tax in the District of Columbia, to name a few examples. Citing the availability of TV programs originally featured on outlets such as PBS, HBO, and the History Channel, the state determined that "much of the Prime television programming and available premium channels is the exact same content that is subject to Iowa sales tax when purchased from traditional cable or satellite providers."

Based on this information, the department determined that Amazon Prime Video fits the state's definition of "pay television," which is taxed. And that means Amazon Prime Video is taxable.

But rather than taxing only Prime Video — either when it's purchased separately, or by segmenting it out from the overall Prime membership fee when applying taxes—the state has determined that the presence of pay television makes the entire Prime membership subject to Iowa sales and use tax:

"Prime is a bundle of goods, services, and other benefits, each distinct and identifiable, sold for one non-itemized price. Accordingly, a Prime Membership is taxable as a bundled transaction if at least one of the individual Prime benefits would be a taxable item when sold separately."

Communications service providers (CSPs) are accustomed to determining taxes and fees on subscription-based services that include a mixture of taxable and nontaxable items. If one item in a bundle is taxable and the other isn't, CSPs that keep good records of what the bundle consists of frequently opt to calculate tax on the taxable items only.

This practice may no longer be safe when it comes to the sales tax in Iowa. With the Amazon Prime ruling, the taxability of an entire bundle of services was determined based on the taxability of just one component.

What this means for you

The ruling could have direct implications for communications service providers that:

1. Sell streaming video services in Iowa. Based on this ruling, it's become clear that any company selling streaming video services on a subscription basis in Iowa will need to consider collecting sales tax on those subscriptions.
2. Offer bundled services in Iowa. In an era where most states have moved away from hardline stances on bundles, many CSPs have become accustomed to calculating sales and use tax—not to mention complex communications taxes—only to the portions allocated to taxable services in their internal unbundling work product. In Iowa, that process may no longer be safe. If you're bundling digital goods and services in Iowa, even if they're non-streaming video services, now is a good time to assess whether it's time to change how taxes are being calculated.

This is just one example of how quickly things can change in the ever-evolving and complex world of communications services, where compliance tends to be a moving target. It remains to be seen if other states will follow Iowa's lead, particularly in those where taxes for digital goods are already being handled differently.

Bottom line: With over 70,000 tax jurisdictions across the continually changing communications industry, staying updated on the taxability of digital services and goods is critical to compliance.

Did you know? Avalara AvaTax for Communications is continually updated to reflect the latest communications tax rules and rates as they change.