Indiana and Illinois Address Sales Tax on Video Game Subscriptions and In-Game Purchases

At a glance

• The main takeaway: The gaming ecosystem has evolved to include options like digital downloads and in-game purchases, which complicates the sales tax treatment.
• Assess the impact: Sales tax rules for online gaming are complex and require nuanced analysis for compliance with each state’s unique guidance.
• Take the next step: Aprio’s State and Local Tax (SALT) team can evaluate your business’s facts and circumstances against applicable state rules to assess your sales tax liability.

Schedule a free consultation today to learn more!

The full story

Many years ago, when we used to go to the store to buy a video game cartridge or a disc, sellers would charge sales tax because the cartridge or disc was considered tangible personal property.   Today, video games are offered in digital versions without the need for a cartridge or disc, and gamers can purchase in-game items or virtual currencies directly from within a game. The absence of a tangible product presents a challenge for sales tax purposes, leading some states to change sales tax rules around video games.

Indiana and Illinois recently released guidance concerning the sales tax implications for a video game publisher.[1] Interestingly, the published guidance appears to have resulted from a request for a ruling submitted by the same taxpayers for the same set of facts.

A closer look at the taxpayer’s request

The taxpayer is an out-of-state video game publisher that sells digital video games through a related entity and through third-party vendors like Steam or PlayStation. Specifically, the taxpayer does not sell the video game, but it does offer gameplayers various options to enhance their gaming experience through these additional items:

1. Monthly online subscriptions that allow the gameplayer to play in an online, multiplayer setting,
2. In-game items, such as costumes, weapons, or time-saving enhancements, and,
3. Virtual currency that allows the gameplayer to acquire in-game items or pay for the monthly online subscription. 

These items are offered to the gameplayer in-game after the video game is purchased through either the related entity or through the third-party vendors.

Indiana’s ruling

Indiana ruled that these offerings are not subject to Indiana sales tax since they are not tangible personal property and are not taxable digital goods. The ruling explained that, like many states, Indiana treats prewritten computer software as tangible personal property; however, the ruling also notes that charges for software provided via the Software as a Service (SaaS) model, where a user accesses software over the internet, are not subject to sales tax.[2] The ruling also explained that while the state does tax specified digital products, which generally include digital videos (e.g., movies), shows, ebooks, songs or ringtones, the taxpayer’s offerings do not meet these definitions.[3] 

Illinois’ rules and guidance

It is important to note that Illinois declined to issue a specific ruling regarding the taxpayer’s request; however, it did provide some general sales tax information that could be applicable to video games and in-game purchases. 

The guidance explains that Illinois taxes the retail sale of canned computer software, which includes video games, when transferred by tangible or electronic media, unless the software license meets the state’s 5-part test.[4] Therefore, the electronic download of video games could be subject to sales tax. However, Illinois does not tax software that is provided via the SaaS model where (i) the provider licenses the use of computer software to a client and manages all needed physical and software resources, and (ii) the possession and ownership of software remains with the provider, and the client accesses the software on web-enabled devices over the internet.[5] 

Based on these rules, the guidance notes that the sale of in-game items and in-game currency could constitute a taxable sale depending on the nature of the extras and how the purchaser uses them. For example, if the sale of extras “unlocks” content already preloaded on the initial download/purchase of the game, that would constitute a taxable sale. Similarly, a purchaser buying an extra item that is downloaded to the game would also be a taxable sale. However, if the purchase merely allows the player to access the item on the seller’s remote server through online play (i.e., nothing is ever downloaded or unlocked in the original downloaded game), then such purchase would not be a taxable sale.

The bottom line

These rulings illustrate how nuanced the taxability analysis can be surrounding the taxability of online video gaming. Aprio’s SALT team has experience analyzing these types of rules and we can assist your business to ensure that it complies with its sales and use tax obligations and does not incur unexpected liabilities and penalties. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

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[1] Indiana Revenue Ruling No. 2024-04-RST, 01/22/2025 and Illinois General Information Letter No. ST-24-0044-GIL, 12/16/2024.

[2] See Sales Tax Information Bulletin #8.

[3] It is worth noting that other states may have a more expansive definition of digital products that could include video games and/or in-game purchases.

[4] See 35 ILCS 105/3-5(44) and Ill. Admin. Code tit. 86, § 130.1935(a).

[5] Note that the City of Chicago may tax software provided via a SaaS model under its Personal Property Lease Transaction Tax.