The Utah Tax Commission recently issued Private Letter Ruling No. 10-011 (2/24/12) in which it determined that the provision of certain web-based services are subject to sales tax under two newly amended sections of the Utah Code. The ruling is a significant shift from prior rulings in Utah that held that access to software on an out-of-state server was not taxable.
A Bushel of Web-Based Services and…
The ruling request asked the Commission to determine the taxability of the several web-based services, all accessible by the user through an application (called an “applet”) installed on the user’s computer or device: (1) a remote-support service whereby the company’s technician could remotely access the user’s computer to assist with technical difficulties in accessing the company’s software through the applet; (2) a remote-access service where the user could access her work or home PC remotely; (3) a web-based service providing the user the ability to conduct online tele-seminars or meetings with other remote participants; and (4) a web-based service allowing users to conduct online training sessions, including the ability to distribute course materials as part of the session. In order to purchase any of these services, the user was required to download the applet on its computer or web-enabled device.
Presumably concerned that the Commission would view the download of the applet (necessary for the user to access any of the services) as the sale or license of prewritten software—a transaction that would be subject to sales tax under Utah Code Ann. § 59-12-103—the company offered detail regarding the applet. The applet was described as a free download to the user that had no function by itself and was “merely incidental” to the provision of the aforementioned web-based services. The company stressed that the applet was only the portal through which the user was able to interface with the company’s software, which provided the services, and that was only accessible on servers located outside of Utah.
… a Peck of New Law
In its determination the Commission cited to the newly amended state sales tax statute—Utah Code Ann. § 59-12-103(113)—that expanded the state’s definition of tangible personal property to include, “prewritten computer software regardless of the manner in which prewritten computer software is transferred.” The Commission determined that the applet, coupled with the user’s purchase of the service, equated to the transfer of a right to use the company’s proprietary software under either a lease or contract. The Commission further determined that the company’s users were really paying for use of the company’s proprietary software rather than a service even though there was no actual transfer of software to the users. Finally, the Commission cited to another newly adopted subsection of the sales tax code—Utah Code Ann. § 59-12-211(12)—in rejecting the company’s contention (as contained in the request) that because the software accessed was housed on a server located outside of Utah, and because no software—outside of the applet portal—was downloaded as part of the provision of services that the services were not subject to tax.
Utah vs. Kansas: Apples-to-Apples or Apples-to-Oranges?
Based on a recent uptick in state tax rulings on web-based services and cloud computing, 2012 may be a banner year for a crop of new rulings on the taxability of web-based services and SaaS (software as a service). In a recently issued ruling on SaaS, the Kansas Department of Revenue determined that determined that charges for a “hosted software product”—in that case, videos offering continuing medical instruction for physicians—are not subject to sales tax. Citing to its previously-issued guidance on the taxation of computer charges and internet sales, and on the heels of a related opinion issued by the Department last summer on the taxation of remote access to online games and virtual goods, the Department determined access to software or applications, etc., by itself, is not a taxable service in Kansas so long as there is no downloading, leasing or owning that software or applications (which would be subject to tax).
It appears that the applet—as well as the software that the user was accessing for purposes of purchasing one of the four products described in the ruling—was one difference between the two rulings. Also, the videos at the heart of the Kansas ruling seem quite different than the services described in the Utah ruling.
Given this decision of the Utah Tax Commission, an interesting consideration going forward will be how similarly situated companies will chose to characterize their services or, perhaps, offer their services if the law—or a potential taxability ruling—will be like Utah (and sales tax considerations will have an effect on the outfit’s business decisions).