Today the Louisiana Fifth Circuit Court of Appeal held that a cable television provider’s video-on-demand (VOD) and pay-per-view (PPV) programming services are not tangible personal property and therefore not subject to sales tax. Newell Normand, Sheriff and Ex-Officio Tax Collector for the Parish of Jefferson v. Cox Communications Louisiana, LLC, Case No. 14-CA-563 (La. App. 5 Cir. December 23, 2014). Sutherland represented Cox in the matter.

Background

The issue in Cox Communications was whether VOD and PPV programming services were subject to local sales and use tax imposed by Jefferson Parish. As the Court of Appeal observed, customers received no rights in the VOD and PPV video content, other than the right to view the content for a limited period of time. The video content was “streamed” to the customer and was not downloaded or stored. The trial court determined that the VOD and PPV programming services were nontaxable services and not tangible personal property.

VOD and PPV Are Not Taxable as Tangible Personal Property

The Parish argued that the VOD and PPV programming services were taxable leases or rentals of tangible personal property, based on two independent theories. The Parish first argued that the programming was “computer software” under Louisiana’s statutory definition of that term because it was “data stored in physical form on Cox’s computer hard drives or proprietary ‘Cloud’ used to produce the visual images and sound on a VOD and PPV customer’s television …” The Parish also argued that the programming was tangible personal property under the general definition because it was “perceptible to the senses” as visual images and sound.

The Court of Appeal rejected the Parish’s arguments and determined that the “VOD and PPV programming are not computer software” and “are not tangible personal property.” In reaching its conclusions, the court considered that the programming: (i) was a digital data stream that requires the provider’s constant involvement and has to be interpreted by software, (ii) was not considered to be software within the cable industry, (iii) was not taxed by other jurisdictions as tangible personal property, and (iv) was included in the local franchise fee base. Op. at p. 5-7.

VOD and PPV Are Nontaxable Services

The Court of Appeal further upheld the trial court’s ruling that VOD and PPV were properly characterized as “nontaxable services.” The Court of Appeal observed that not only were VOD and PPV services not listed by statute as an enumerated taxable service, but also that cable television services, a defined term that includes VOD and PPV programming, are “exempt from sales tax pursuant to La. R.S. 47:301(29)(x)(vii)” as well as under La. R.S. 47:305.16. Op. at p. 10-11.

Expert Opinion by Law Professor Was Properly Admissible

The trial court had admitted into evidence a tax law professor’s expert testimony on behalf of the taxpayer regarding tax policy matters and the tax laws of other states. The Court of Appeal, rejecting the Parish’s objections, determined that it was not an abuse of discretion for the trial court to admit testimony that did not opine on Louisiana state law. Op. at p. 11-12.

Conclusion

States have sought to administratively expand the sales tax base by attempting to include various services within the definition of tangible personal property, including Cloud services. Taxpayers should expect to see additional litigation in this area.