The North Carolina Department of Revenue (DOR) issued a letter ruling, at a taxpayer’s request, on whether a monthly subscription fee for access to a video game’s online features is subject to North Carolina sales and use tax. Based on the facts provided, the DOR concluded that the fee is subject to state and local sales and use tax.
The Inquiry and DOR's Analysis
The taxable person is an out-of-state video game publisher that offers monthly subscriptions allowing customers to access the online features of its video game. Customers must first purchase the game in electronic format from a related entity or third-party wholesaler, which collects the applicable sales tax on the game purchase.
The monthly subscription is optional, can be canceled at any time, and does not affect the customer's ownership of the previously purchased game. However, a subscription is necessary to access online features, including multiplayer gameplay.
The DOR clarified that North Carolina imposes state, local, and transit sales and use taxes on retailers’ net taxable sales or gross receipts from tangible personal property, certain digital property, and taxable services. Under state law, prewritten computer software includes software developed for general use rather than for a specific purchaser, as well as certain software originally developed for a specific purchaser but sold to another person.
A sale includes the transfer of ownership, a license to use or consume property, or the provision of a service in exchange for payment, whether the transaction is conditional or conducted by any means. Prewritten computer software is also classified as tangible personal property for sales and use tax purposes.
The DOR determined that the video games qualify as prewritten computer software because customers generally download them for use. The monthly subscription is required to access certain features of the games, meaning that customers pay for the right to use additional functionality of the software. Consequently, the monthly subscription fee constitutes a taxable sale of a license to use prewritten computer software and is subject to North Carolina sales and use tax.
Conclusion
Video game publishers operating in North Carolina should treat recurring subscription fees for online game features as taxable sales of prewritten computer software licenses, even when the underlying game was already purchased and taxed separately. Businesses should review their subscription models, transaction structures, and sales tax collection processes.
