North Carolina – Sourcing Rules for Taxable Digital Property

SALT Report 2847 – The North Carolina Department of Revenue issued a notice that discusses the sourcing rules for taxable sales of certain digital property. The notice provides that under N.C. Gen. Stat. § 105-164.4(a)(6b) state and local sales and use taxes apply to the net taxable sales or gross receipts derived from sales of the following digital property:

  • Audio work,
  • An audiovisual work,
  • A book, magazine, newspaper, newsletter, report, or other publication, and
  • Photographs or greeting cards

Sales and use tax applies to these items when they are delivered or accessed electronically, are not considered tangible personal property, and would generally be taxable if sold in a tangible medium.  Additionally, tax applies regardless of whether the purchaser has the right to use the digital good permanently, or has the right to use it without making continued payments.

When souring sales of digital property, the notice states that a purchaser receives the digital property when they take first possession of the property, or first use the property, whichever comes first.  Therefore, the following sourcing rules should be used for sales and use tax purposes:

  • If the purchaser receives the digital property at the seller’s business location, the sale is sourced to that business location,
  • If the purchaser receives digital property at a location that is specified by the purchaser and the location is not the seller’s business location, the sale is sourced to the location where the purchaser receives the product,
  • If examples 1 and 2 do not apply, the sale of digital property is sourced to a location indicated by an address for the purchaser that is found in seller’s the business records, so long as the use of this address does not constitute bad faith,
  • If the first 3 examples do not apply, the sale of digital property is sourced to the location indicated by the purchaser’s address that is obtained during the sales transaction.  This includes the address that may be found on the purchaser’s choice of payment, so long as use of this address does not constitute bad faith, or
  • If none of the above examples apply, the location will be determined based on the address that was used when the digital good was first available for transmission by the seller

For Further Information

North Carolina Department of Revenue – Important Notice: Sourcing for Certain Digital Property Subject to Sales and Use Tax