The Indiana Department of Revenue (“Department”) determined last month that a video game publishing company’s sales from optional video game enhancement features were not subject to sales tax in Indiana. Ind. Rev. Rul. No. 2024-04-RST (Jan. 7, 2025).

The Facts: A non-Indiana video game publisher (the “Company”) sells optional video game features that enhance gameplay experience. The Company does not sell video games itself; rather, video game sales are made by a related entity of the Company. After a video game is purchased, the Company offers three optional features to the video game purchaser: (1) a monthly online subscription that allows the purchaser to play the video game online and in a multi-player setting; (2) in-game items, such as character costumes and weapons; and (3) virtual currency that the purchaser can use to pay for a monthly subscription or in-game items.

The Company requested that the Department issue a revenue ruling regarding the applicability of Indiana’s sales tax on its offerings. The Department did and determined that the Company’s offerings are not subject to the State’s sales tax.

The Law: Indiana imposes a sales tax on retail transactions made in the State and on certain specified services delivered in the State. Indiana tax law generally defines a retail transaction as a transfer of tangible personal property in the ordinary course of business and also sets forth specific examples of “retail transactions.” 

Relevant here, transfers of prewritten computer software, whether delivered electronically or in a tangible medium, are retail transactions subject to sales tax. Sales tax is not imposed, however, on transactions that merely provide a right to remotely access prewritten computer software over the Internet or on sales of software as a service. Thus, if the transaction does not result in the purchaser having a possessory or ownership interest in the software, then sales tax does not apply.

In addition to transfers of prewritten computer software, electronic transfers—which grant a right of permanent use to an end user—of digital audio works, digital audiovisual works, and digital books are subject to sales tax. “Digital audio works” include works such as songs and ringtones, “digital audiovisual works” include works such as movies, and “digital books” include works that are generally recognized in the ordinary and usual sense as books. These are the only digital products on which Indiana imposes sales tax.

The Ruling: In determining whether the Company’s sales were subject to sales tax, the Department analyzed the Company’s offerings under the above provisions. Ultimately, the Department ruled that the Company’s sales of monthly subscriptions, in-game items, and virtual currency are not subject to sales tax because the sale of such items do not fit into Indiana’s definition of a “retail transaction,” and the items do not fall within the enumerated services on which Indiana imposes sales tax. The Department reasoned that the Company’s offerings are neither tangible personal property nor do they fall within the definitions of digital audio works, digital audiovisual works, or digital books. 

The Takeaway: This revenue ruling is helpful for taxpayers to better understand how the Department interprets Indiana’s sales tax law to apply to these digital transactions. While the revenue ruling applies only to the Company’s facts and circumstances as described, the ruling expressly states that other taxpayers with substantially identical factual situations may rely on the ruling in preparing returns and making tax decisions. Furthermore, taxpayers can and should use revenue rulings to try to persuade taxing authorities that their position is the correct one.