South Carolina Ruling Exempts the Sale and Rental of Digital Textbooks

By: Camille Adams, SALT Senior Associate

At a glance

• The main takeaway: South Carolina issued a private letter ruling in which it determined that the sale and rental of digital textbooks qualified under the state’s exemption for textbooks because the transaction did not constitute the sale of communication services.
• Assess the impact: This ruling highlights the importance of understanding how a state interprets its definitions of taxable products and services. 
• Take the next step: Aprio’s State and Local Tax (SALT) team understands the varying interpretations that states apply to taxable products and services. We can analyze your transactions to determine your sales tax obligations.

Schedule a free consultation today to learn more!

The full story:

The South Carolina Department of Revenue (DOR) recently issued a private letter ruling addressing whether the sale and rental of digital textbooks are exempt from sales and use tax.[1]

A closer look at the case

The taxpayer is an operator of physical and virtual bookstores for K-12 and college campuses, and it also sells and rents digital textbooks to students, referred to as eTextbooks. When students purchase or rent the eTextbooks, they can either receive a physical card with an access code or receive the access code via email. The eTextbooks are accessible online via an internet browser as well as offline through the taxpayer’s app. The access code for rented eTextbooks expires at the end of each semester for which the textbook was rented, while purchased eTextbooks are available indefinitely. The eTextbooks can be read online or offline through any supported device and provides interactive features including highlights, notes, and flashcards.

Unpacking the ruling

Before diving into the ruling, it’s important to note that South Carolina imposes tax on retail sales of tangible personal property.[2] Tangible personal property means “personal property which may be seen, weighed, measured, felt, touched, or which is in any other manner perceptible to the senses” and includes “services and intangibles, including communications, . . . the sale or use of which is subject to tax.”[3]

With respect to communication services, the state imposes tax on “gross proceeds accruing or proceeding from the charges for the ways or means for the transmission of the voice or messages,” which includes database access transmission services or online information services, as well as charges for website access (including application service providers).[4]

Exempt from sales tax is the sale of “textbooks, books, magazines, periodicals, newspapers, and access to on-line information systems used in a course of study in primary and secondary schools and institutions of higher learning.” Items in this category may be in any form, but transactions subject to tax as a communications service do not qualify for this exemption.[5] Thus, if the sale of eTextbooks qualified as a communications service, then they would not qualify for the exemption.

The DOR applied the true object test to conclude that the transaction is for the eTextbook and not for a communication service. The ruling explained that students are not required to have an internet connection to access the eTextbooks. In addition, the access code does not provide students with access to a library of course materials and educational information, but only provides access to the specific eTextbook that was purchased or rented.

Finally, the DOR noted that the eTextbooks still qualify as “textbooks” for the sales and use tax exemption since the statute states that textbooks can be “in any form.” The ruling also explained that prior DOR guidance has expanded the concept of what is considered a “textbook” beyond printed matter, and may also include “tapes, recordings, and filmstrips when used as part of a prescribed course of study. The items deemed to be textbooks and subject to the sales tax exemption are those which contain and, in fact, are themselves, educational sources of information. In other words, these items contain the information that is being taught, just as a textbook does.”[6]

The bottom line

This ruling highlights the importance of understanding both the different categories of products and services that a state considers taxable, and that commonly understood words may not be defined by a state for sales and use tax purposes based on their commonly understood meaning (e.g., South Carolina’s definition of “communication services” and its expanded concept of “textbook”).

Aprio’s SALT team has experience with understanding the different interpretations that states apply to their taxable products and services. We work with our clients to analyze fully whether their transactions may be taxable. In some cases, we may draft and submit a binding ruling request to provide the business with certainty regarding its sales tax obligations. Our goal is to ensure that your business complies with sales tax requirements 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] S.C. Private Letter Ruling #24-2 (March 18, 2024).

[2] S.C. Code Ann. § 12-36-910(A)

[3] S.C. Code Ann. § 12-36-60

[4] S.C. Code Ann. § 12-36-910(B)(3); S.C. Code Regs. § 117-329.4(k).

[5] S.C. Code Ann. § 12-36-2120(3).

[6] S.C. Technical Advice Memorandum #90-6 (March 7, 1990).