Are Your Online Services / Software Taxable?
In a recent Massachusetts Letter Ruling (11-2), Massachusetts held that the purchase of the taxpayer's core service offerings and updated data packages were not subject to tax, but were nontaxable database access services. However, Massachusetts did hold that the workflow add-ons were subject to sales and use tax as sales of a right to use prewritten software. These charges are optional and separately stated from the core service offering and database charges.
The Company is engaged in the business of providing commercial information about the financial condition of businesses to its customers located throughout the U.S. and abroad. This information is provided through the Company’s Risk Management Solutions database. This database enables customers to access select financial information to mitigate credit and supplier risk, increase cash flow and drive increased profitability. Information gathering, analysis, formatting/explanation, and dissemination are conducted at the Company’s locations in either New Jersey or Pennsylvania.
The Company's service offerings included: (1) a Core service offering, (2) Upgraded Data Packages, and (3) Workflow Add-ons. For more details on the services, go to the RULING.Ruling
The Company provides information services to its customers based on data it gathers on the Web and other sources and then provides this information to its customers in various formats and levels of detail depending on which service options a customer chooses. The Company asserts that this is a nontaxable service. We agree that where the object of the transaction is simply to obtain information, the transaction is not subject to tax. The object of the customers’ use of the Company’s core service offering and updated data packages is to obtain database access including reports prepared by the Company, rather than the use of the software itself. Thus, the Company’s core service offering and updated data packages are nontaxable database access services that allow customers to access information that the Company has gathered.
However, the Company describes the workflow add-ons as services that customers can add to their core service offering by purchasing them for an additional fee which is separately invoiced from the basic or upgraded database packages. These optional add-ons are hosted on the Company’s server or on a 3rd party server. The sale of a license or right to use software on a server hosted by the taxpayer or a third party, as described in 830 CMR 64H.1.3(3)(a), are taxable under Massachusetts sales and use tax laws. See 830 CMR 64H.1.3(14)(a).
The workflow add-ons are customizable web-based tools that enable customers to establish rules and approval limits to automate credit decisions. Using this software, customers can also enter information concerning their existing accounts and rules to trigger labeling for such accounts (i.e., a credit indicator drops below a certain level the account gets flagged for review). They can manage overall risk exposure of businesses and create a customizable credit application to meet their personal business needs. The data entered into the application is fed into that customer’s database for the customer to use on an ongoing basis and without further direct involvement by the Company.
Since the workflow add-ons are optional and generally purchased at a later date and are separately invoiced, they are not included in the non-taxable core service offering and updated data packages. With regard to workflow add-ons, the customer itself is using the Company’s software to acquire and manipulate various types of information it chooses with respect to businesses and the customer’s accounts receivable. The object of the transaction is to access the Company’s software for the purpose of manipulating information that the customer inputs as well as information from the database to accommodate current business needs. Therefore, we rule that the workflow add-ons are subject to the Massachusetts sales and use tax.
More and more companies are providing online services or access to software via the web. As this trend continues, it is not always clear how a state will tax those services or software access for sales and use tax purposes. Therefore, it is very important that a company address this issue to mitigate any exposure.
The above is just one example of how Massachusetts may treat your company's or client's online services. Other states' treatment may vary.
Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State Tax Notes entitled, "The SALT Effect." For more info, visit his website: www.leveragestateandlocaltax.com
You can reach Brian at firstname.lastname@example.org.
Because state and local taxes are deceptively simple and endlessly complicated.